In computer integrated manufacturing environment, tool management plays an important role in controlling tool performance for machining operations. Knowledge of tool behavior during the cutting process and effective tool-behavior prediction contribute to controlling machine costs by avioding production delays and off-target parts due to tool failure. The purpose of this paper is to review and develop the tool condition monitoring scheme for drilling operation to assure a fast corrective response to minimize the damage if tool failures occur. If one desires to maximize system through-put and product quality as well as tooling resources, within an economic environment, real-time tool sensing system and information processing system can be coupled to provide the necessary information for the effective tool management. The example is demonstrated as to drilling operation when the aluminum composites are drilled with carbide-tipped HSS drill bits. The example above is limited to the situation that the tool failure mode of drill bits is wear.