A 40-Gb/s optical time division multiplexing (OTDM) return-to-zero (RZ) transmission experiments including a dynamic polarization mode dispersion (PMD) compensation was reported. The dynamic PMD compensator is made up of two-stage four degrees of freedom (DOF). The first stage adopts polarization controller and fixed time-delayed line. The second stage is variable differential group delay (DGD) element. The PMD monitoring technique is based on degree of polarization (DOP) as error signal. A novel practical adaptive optimization algorithm was introduced in dynamic adaptive PMD compensation. The experimental results show that the performance of the PMD compensator is excellent for 40-Gb/s RZ transmission systems with the large DGD. With this compensator, a significant improvement of system performance can be achieved in the eye pattern of a received signal. The first-order compensating ability of the compensator is greater than 30 ps. The second-order compensating ability is greater than 200 ps2. The first-order optimum compensating time is within 10 ms. The second-order optimum compensating time is within 24 ms.