Vibration analysis is widely used in machinery diagnosis, and wavelet transform and envelope analysis have also been implemented in many applications to monitor machinery condition. Envelope analysis is well known as a useful tool for the detection of rolling clement bearing faults, and wavelet transform is used in research to detect faults in gearboxes. These are applied for the development of the condition monitoring system for early detection of the faults generated in several key components of machinery. Early detection of the faults is a very important factor for condition monitoring and a basic component to extend CBM (Condition-Based Maintenance) to PM (prediction Maintenance). The AE (acoustic emission) sensor has a specific characteristic on the high sensitivity of the signal, high frequency and low energy. Recently, AE technique has been applied in some studies for the early detection of machine fault. In this paper, a signal processing method for AE signal by envelope analysis with discrete wavelet transforms is proposed. Through the 15 days test using AE sensor, misalignment and bearing faults were observed and early fault stage was detected. Also, in order to find the advantage of the proposed signal processing method, the result was compared to that of the traditional envelope analysis and the accelerometer signal.