We present an all-digital demodulation system of interferometric fiber optic sensor based on an improved arctangent- differential-self-multiplying (arctan-DSM) algorithm. The total harmonic distortion (THD) and the light intensity disturbance (LID) are also suppressed, the same as those in the traditional arctan-DSM algorithm. Moreover, the lowest sampling frequency is also reduced by introducing anti-aliasing filter, so the occupation of the system memory is reduced. The simulations show that the improved algorithm can correctly demodulate cosine signal and chirp signal with lower sampling frequency.