AbstractA spectral‐amplitude coding (SAC) optical code‐division multiple‐access (OCDMA) system with M‐ary pulse‐position modulation (PPM) signalling is investigated. Novel combinatorial construction of optical signature codes is also presented, as that is applicable to both synchronous and asynchronous incoherent OCDMA. A union upper bound on the probability of error is then derived and the performance characteristics are discussed in the presence of multiple‐access interference (MAI) and intensity noise. The numerical results show that the bit‐error performance of the OCDMA system with proposed PPM coding outperforms that associated with on—off keying (OOK). Copyright © 2008 John Wiley & Sons, Ltd.