In this paper, a system is described that uses the wavelet transform to automatically identify the particular failure mode of a known defective transmission device. The problem of identifying a particular failure mode within a costly failed assembly is of benefit in practical applications. In this system, external acoustic sensors, instead of intrusive vibrometers, are used to record the acoustic data of the operating transmission device. A skilled factory worker, who is unfamiliar with statistical classification, helps to determine the feature vector of the particular failure mode in the feature extraction process. In the automatic identification part, an improved learning vector quantization (LVQ) method with normalizing the inputting feature vectors is proposed to compensate for variations in practical data. Some acoustic data, which are collected from the manufacturing site, are utilized to test the effectiveness of the described identification system. The experimental results show that this system can identify the particular failure mode of a defective transmission device and find out the causes of failure successfully.