The paper presents an application of the wavelet transform for damage detection based on optical measurements. A number of important issues that need to be considered when image sequences are used for vibration analysis are discussed. These include: correspondence of image features from image to image, image calibration and spatial resolution. The principles of image edge detection are discussed and a comparison between the wavelet approach and the classical method is presented. A novel damage detection method based on optically measured mode-shape data is proposed. The method is illustrated using a simple cantilever beam experiment. The major advantage of the method is the significantly increased number of discrete points used to describe mode shapes. This is in contrast to classical techniques where in practice a small number of measurement points are obtained from a limited number of sensors.