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A technique is described to eliminate polarization-induced fading in fiber-optic interferometers with two or three polarizers. Modeling and simulation show that two polarizers should be angularly spaced by 90 degrees to alleviate polarization-induced fading. A test system is set up with two 6.5 km fiber coils to link the data. A bistate polarization diversity receiver is tested for reducing polarization-induced fading. The signal is demodulated using a digital phase-generated carrier and the system demonstrates self-noise up to 7.7 microrad/square root Hz (at 1 kHz).