This chapter presents a comprehensive review of recent advances in the applications of discrete wavelet transform (DWT) in optical fibre sensing. DWT, like Fourier transform (FT), is a versatile and powerful mathematical tool to process, extract and analyse data. In fibre sensing, DWT is particularly useful in the demodulation, demultiplexing and denoising of sensor data, as well as in the detection, extraction and interpretation of measurand-induced change from an acquired sensor signal. Both continuous and discrete has found a wide variety of applications in fibre sensing, and has been extensively used for fibre Bragg gratings (FBGs) and interferometric sensors. For example, Chan et al. (2007, 2010) used wavelet transform (both continuous and discrete) in reducing noise and increasing wavelength detection accuracy of FBGs; Jones (2000a, 2000b) used in the edge detection and crack detection of FBGs embedded in some structures; Staszewski et al. (1997) and Bang & Kim (2010) used for the detection of acoustic wave induced by impact and defect in composite plates; Gangopadhyay et al. (2005, 2006) used to extract and analyse fibre Fabry-Perot interferometer signals; Lamela-Rivera et al. (2003) used in the detection of partial discharges from high-power transformers; Tomic et al. (2010) in pressure sensing; and Wang et al. (2001) in the health monitoring of ship hull structure. This chapter begins with a brief introduction on the applications of DWT in fibre sensing. This follows by the principles and approaches of using DWT. Several important and fundamental formulations and concepts, such as the use of DWT in signal demodulation, demultiplexing and noise reduction will be presented. Next, four exemplary application cases of using DWT in fibre sensing are presented. More specifically, representative topics with regard to sensor signal analysis, signal demodulation, noise reduction and demultiplexing of multiplexed sensor systems are described in details. Finally, conclusions to summarise the chapter is given. 2. Principles and approaches In fibre sensing, there are two areas of signal analysis that DWT has been widely employed, namely sensor signal demodulation and noise reduction. The former is accomplished by the theory of Multiresolution analysis (MRA) and the latter by the wavelet denoising. This section will describe these two DWT techniques qualitatively, and all of the subsequent examples are essentially based on them. www.intechopen.com Discrete Wavelet Transforms-Biomedical Applications 222 2.1 Sensor signal demodulation The DWT demodulation technique presented here is used to demodulate and demultiplex many types of multiplexed sensor signals, and it works best with periodic sinusoidal functions, which is often the case for most interferometric signals. Excellent references in the theory and properties of wavelets can be found in (