The concept of Computer Integrated Manufacturing (CIM) and Flexible manufacturing System (FMS) has created a whole new area of what is called ?tool management system? (TMS). For efficient operation of TMS, a real-time monitoring of tool condition is desirable. Tool health monitoring is critical in today?s automated production and is likely to become crucial as we progress towards the unmanned factory of the future. This paper describes the development of a microcomputer-based acoustic emission (AE) system for monitoring progressive wear of a cutting tool. Acoustic emission technique (AET) with potential for many important applications has already become an important than destructive testing (NDT) technique. This paper also describes the state of art of acoustic emission technique and its comparison with other techniques for tool condition monitoring..