Polarization-switched quadrature phase-shift keying has been demonstrated experimentally at 40.5 Gb/s with a coherent receiver and digital signal processing. Compared to polarization-multiplexed QPSK at the same bit rate, its back-to-back sensitivity at 10(-3) bit-error-ratio shows 0.9dB improvement, and it tolerates about 1.6 dB higher launch power for 10 × 100 km, 50 GHz-spaced WDM transmission allowing 1 dB penalty in required optical-signal-to-noise ratio relative to back-to-back.