A simple and effective polarization demultiplexing method employing improved optical splitter and digital signal processing (DSP) algorithm for intensity-modulation direct-detection (IM/DD) optical communication systems is proposed. Simulation results show that in a 2×40 Gb/s polarization-division-multiplexing intensity-modulation direct-detection (PDM-IM/DD) optical transmission system, the PDM signals can be effectively separated. The DSP algorithm can rapidly converge with the receiver sensitivity of -2.3 dBm at bit error rate of 10-4.