Reduction of DWDM nonlinear fiber penalties by the use of DPSK modulation and an optically preamplified self-homodyning receiver is discussed. Maintaining a constant instantaneous channel power by phase shift keying, we can anticipate reduction of cross-phase modulation penalties. Our modeling results show 0.9-dB benefit in Q performance for 50-GHz spaced, 32 x 10 Gb/s transmissions with nonzero dispersion shifted fiber.