The inability of radio frequency electromagnetic waves to propagate without attenuation in seawater has traditionally limited underwater communications to acoustics or tethered systems. High bandwidth optical communication systems have been demonstrated for terrestrial and space applications. There is growing interest to see if short range high bandwidth optical wireless systems can be made for the underwater environment. In this thesis we demonstrate a 1 Mbps optical wireless system using LEDs and PIN photodiodes that also incorporates capabilities for signal processing of the received data to be performed. Lasers and Photomultiplier tubes offer high performance, and are generally used in most underwater optical communication systems. However, these components are relatively expensive and can have large form factors. As an alternative solution the much cheaper and more compact LEDs and photodiodes are used as transmitters and receiver components. However, compared to a laser and PMT based system, such a system would be strongly disadvantaged in photon limited environments. If one assumes that photons actually reach the receiver, using signal processing techniques, optimized modulation formats, and error-correction coding, one expects that the range of the system can be extended. The development of a prototype system for the experimentation and verification of this proposition is the main motivation of this thesis. Small, compact transmitters using High Power LEDs and receivers using Si Photodiodes where the data can be digitally sampled such that signal processing techniques can be applied were constructed and demonstrated using a 12 foot, 1200 gallon tank that was also constructed for the project. It was shown that the LED and photodiode based system works well for short ranges, and that advantages can be obtained using digital signal processing. The applicability of this strategy to use digital signal processing techniques can be easily extended to higher performance Laser/PMT based systems.