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Atmospheric turbulence impairs the performance of free-space optical links by perturbing optical power at the receiving terminal. The resulting reduction in the link performance can be partially compensated if the strength of the optical fade (channel state) is known to the receiver. For an atmospheric optical channel with on-off keying modulation, the optimal estimator of the channel state is determined and a nonlinear filtering scheme is developed to efficiently compute the estimation. In addition, the optimal method of incorporating this estimation in reconstruction of the receiving message is presented.