This paper presents a novel digital technique for transformer protection. The technique is based on deriving a directional quantity proportional to the fault current signal and the prefault voltage signal. Standard fast wavelet transform (FWT) schemes may not be as effective for data that has chiefly oscillatory features. An effective solution to discrimination involves examining the signal in both the time and frequency domains simultaneously. The wavelet packet transform is an extension of the FWT that allows for finer characterization of signal content for both time and frequency together. A 11/132-kV transformer connected to a 132-kV power system was simulated using Alternative Transient Program/Electromagnetic Transient Program (ATP/EMTP). Results indicate that the proposed technique is stable, reliable, and fast during the discrimination between internal and external faults, magnetizing inrush currents, and internal faults, ratio-mismatch, and saturation of current transformers (CTs). Index Terms--Current-transformer (CT) saturation, inrush current, ratio-mismatch, transformer faults, wavelet packet transform (WPT).