The closed-loop optimal control law obtained for a linear time-invariant system always requires the entire state vector to be available for direct measurement. It is seldom that all the state variables of a physical system are available for measurement. A compatible dynamic observer of the Luenberger type is designed to reconstruct the entire state vector for a synchronous machine-infinite bus system. The performance of the system with the observer cascaded to the optimal controller is compared with the performance of the system when all the state variables are available for feedback. The transfer matrix relating the output and input is derived.