Pulse sources based on lithium niobate modulators are very attractive for optical time division multiplexing (OTDM) transmission systems because the modulators are now commercially available, qualified for system use, and can operate up to very high speeds and over a wide wavelength range. In this paper, we describe the principles of operation and performance of the pulse source based on lithium niobate modulators. The pulse source is based on a Mach-Zehnder intensity modulator (IM) and two phase modulators (PMs). The continuous-wave (CW) light is modulated in an IM and then strongly phase modulated in two cascaded PMs. The chirped pulses are subsequently compressed to desired width using dispersion compensation technology. This method has the advantage of acquiring larger chirp using normal PM rather than that special designed PM of very low V_π. It can also generate shorter pulses than conventional methods incorporating only one PM driving by a radio frequency (RF) signal with the power larger than 1 W which may damage the device. Generation of 40 GHz optical pulses shorter than 2 ps is theoretically illustrated, simulated and experimentally verified. Experimental results show that 40 GHz phase stable optical pulses with pulse-width of 1.88 ps, extinction ratio (ER) larger than 20 dB, the timing jitter of 57 fs and signal-to-noise ratio (SNR) of 32.8 dB can be achieved. This is also a cavity-less pulse source whose timing jitter is determined only by the RF source rather than by the actively controlled cavity. In the experiment, the phase noise of the RF source we used is as low as -98.13 dBc/Hz at a 10 kHz offset frequency which resulting very low timing jitter of generated pulses. The pulses are then modulated at 40 Gbaud/s with an inphase/quadrature (I/Q) modulator and multiplexed to 160 Gbaud/s with less interference between each other. After back-to-back demultiplexing by an electro-absorption modulator (EAM) to 40 Gbaud/s and demodulation by a delay interferometer (DI), clear and opened eye diagrams of 40 Gbaud/s I and Q tributary signals are obtained which verify the good performance of generated pulses in the 160 Gbaud/s differential quadrature phase shift keying (DQPSK) OTDM system and further prove the phase stability and high quality of generated pulses.