A method and system for compensating for side effects of cross gain modulation in amplified optical networks, which allows reliable identification of expected and unexpected channels in the network is provided. Each optical channel traveling in the optical network is marked with a unique channel signature (expected channel signature), having one or more dither tone modulated onto the optical channel; followed by detecting a spectrum of tones, including said modulated dither tones and ghost tones thereof produced by the cross gain modulation in the optical network, at various locations in the optical network. Amplitudes of the spectrum tones, which belong to the expected channel signature, are compared with a first threshold, while amplitudes of the remaining spectrum tones, which are not the valid tones, are compared with a second threshold, which is lower than the first threshold. The spectrum tones are identified as valid tones if their amplitudes are above the first threshold; and an alarm signaling that the expected channel signature is missing is generated if the amplitude of the spectrum tone is below the first threshold. Yet another alarm is generated signaling that an unexpected channel is detected in the network if the amplitude of at least one of the remaining spectrum tones is exceeding the second threshold. Alternatively, the other alarm is generated if amplitudes of the remaining spectrum tones belonging to one of the allowable channel signatures in the network are above the second threshold. A corresponding system incorporating the step of the methods described above is also provided.