It's just a variation of signal analysis. If you took college calculus/numerical analysis, you are probably familiar with the power/taylor series representation, and the fourier transform or laplace transform. It's similar, but with different features.
In Fourier analysis, you replace a function in the time domain f(t) with an infinite sum of harmonic functions. Any function can be represented by a sum of sin/cos functions. The result is that you can see the frequencies that make up the original function.
For example, if I take a sample of your voice for 5 seconds, I can decompose it into a sum of frequencies representation and plot it. I will see that most of the energy of your voice is distributed in the 3-8Khz region.
However, the Fourier transform loses the aspect of "locality" and time. It is a global analysis of the signal. I can see the frequency spectrum of your voice for the whole 5 seconds, but I don't really see what happened in detail between 1.203 seconds and 1.208 seconds.
To get around this, people tried "windowing" the Fourier series. For example, I could compute the transform between 0-1seconds, 1-2 seconds, 2-3 seconds, 3-4 seconds, and 4-5 seconds, and then combine them. However, windowing will introduce errors because the Fourier basis functions (sine and cosine) are infinite in extent.
The goal then is to come up with basis functions that evaluate close to zero outside the "window"
Wavelets are designed to solve these problems. Wavelets introduce the notion of "scale" so that now you transform the original signal to frequency representation, but you can choose the scale (resolution) you do it at. The wavelet basis functions (of which there are many) deal much better with windowing errors.
These two features (error tolerant windowing and multiscale analysis) make wavelets great at image compression and noise reduction.