Detection of abnormalities and defects in rotating machinery at incipient stages is of prime importance for industrial plants and equipment. It avoids the occurrence of unplanned down time of the machinery that causes serious damage and costly downtime. Several condition monitoring techniques have been applied to rotating machinery in order to improve the plant reliability and reduce the downtime. This paper aims to investigate the effectiveness of Acoustic Emission (AE) system for incipient detection of faults related to rotating machinery. A system that is developed to provide a test-bed for this concept is described. A real time AE measurement system is developed and tested. The acquired AE signatures are processed and analyzed using LABVIEW. Time and frequency domain analysis are performed to identify the exact faults in the machinery. © 2008 IEEE.