This Paper is concerned with effective signal identification method for tool breakage and micro chipping using discrete wavelet transform of feed motor current in milling operations. The wavelet transform uses an analyzing waveletfunction which is localized in both frequency and time domain to detect subtle time localized changes in input signals. The changing pattern of wavelet coefficient is continuously compared to detect tool breakage and micro chipping over one spindle revolution. The results indicate that the wavelet transform can identify tool failure with much greater sensi- tivity than the time domain monitoring and frequency domain monitoring such as FFT. Experimental results are presented to support the proposed scheme.