We have proposed a system employing digital signal processing for real-time measurement of distance, velocity and displacement by means of optical frequency modulation in the time domain. Optical system was composed of external cavity tunable diode laser whose optical frequency was modulated into the shape of triangle wave and the unbalanced Michelson interferometer with optical path difference (as distance) between measurement arm and reference arm. Measurement arm was displaced by mounted piezo-electrical transducer (PZT). Developed signal processing instruments were named Software Instruments. The Interface circuits of input and output part expanded digital signal processor were designed and manufactured. The digital signal processor calculates the phase change of optical frequency modulation from interference signal in the time domain. The phase change is converted into the distance, the velocity and the displacements. When Software Instruments operated with sampling frequency 80kHz, this system was able to perform the measurements in the period of 1.25ms.