A novel scheme for all-optical inverted wavelength conversion with 40-Gb/s pseudorandom bit sequences (PRBSs) based on a modified terahertz optical asymmetric demultiplexer (TOAD) is proposed. The performance of the proposed wavelength converter is analyzed in term of extinction ratio (ER) through numerical simulations. For a typical ER of 10 dB, some key characteristic parameters of the semiconductor optical amplifier (SOA) are designed. With the properly designed parameters, a high quality eye diagram is achievable, indicating that the amplitude fluctuation of the output signal is effectively reduced.