This paper reports the development of a very compact and very-high sensitivity optical fibre hydrophone system using a distributed-feedback fibre laser with a cavity length of 10cm. A theoretical system design making use of a Mach-Zehnder interferometer, homodyne demodulation scheme and digital signal processing is described. At the time of writing, the system is only partially completed; therefore the content of this paper will focus on the distributed-feedback fibre laser sensor head. Results for noise spectrum below 100kHz are presented, as well as discussions on some key issues with designing such hydrophone systems. Although not the intention for the system, initial results also indicate the suitability of the DFBFL for intensity modulated sensing.