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This paper describes the application of wavelet transform (WT) to detect internal leakage in hydraulic actuators, caused by seal damage. The method analyzes the pressure signal at one side of the actuator in response to periodic step inputs to the control valve. It is shown that the detailed version of decomposed pressure signal, using discrete WT, establishes feature patterns that can effectively detect internal leakage and its severity. The proposed scheme requires a baseline (threshold) value, predetermined first by analyzing the pressure signal of a healthy actuator. Once the root mean square (rms) of the level-two detail coefficient values, obtained from the measured pressure signals in subsequent offline tests, fall below this baseline, a fault alarm is triggered. Furthermore, the degree of changes of the rms value from the one obtained under normal operating condition indicates the severity of fault. Experimental tests show promising results for detecting internal leakages as low as 0.124 L/min, representing approximately 2.6% reduction of flow rate available to move the actuator. This is done without a need to model the actuator or leakage. Other methods of leakage fault diagnosis require the model of the actuator or leakage fault. Furthermore, no other method reported the internal leakage detection of magnitude as low as the one reported in this paper.