The concept of CIM and 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. The paper describes the development of a microcomputer-based acoustic emission (AE) system for monitoring progressive wear of a cutting too!. It also includes results of experiments conducted with the system. The state-of-the-art in AE technique and its comparison with other techniques for tool condition monitoring are also presented.