A general theoretical analysis of two-beam interference between modulated light signals is presented. It is demonstrated that a Michelson interferometer (MI) with short path difference can be used for demodulation of optical frequency modulation (FM) signals. The demodulated signal is usually a wide-band FM signal charaeterized by an effective FM index βeffin the order of 10-100, and the "conversion efficiency" of the demodulation is given by the ratio between the actual βeff-value and its low-frequency limit. For incoherent applications interference must generally be avoided as the demodulated wide-band signal generates harmonic distortion of high order. The close connection between interferometric demodulation and modal distortion in multimode fibres is demonstrated. An improved theory of modal distortion is presented and numerical examples of modal distortion are calculated. In practical cases the amount of distortion can be estimated on the basis of the fiber dispersion, the frequency deviation of the laser and the amount of spatial filtering.