We have investigated the effect of magnetic saturation of core materials on the diagnosis of static and mixed-eccentricity faults in induction motors. We modeled the faults by using a modified winding function (MWF) and time-stepping finite-element (TSFE) methods to compute the stator currents of both healthy and faulty motors for processing. We then analyzed the stator signal spectra of the motors by the MWF and TSFE methods and estimated the amplitudes of sideband components attributable to the faults. The results obtained by TSFE agreed well with experimental measurements. However, there was considerable discrepancy between the MWF results and the experimental measurements. We investigated the reason for the discrepancy by analyzing the air gap magnetic field distribution in both healthy and faulty induction motors in order to determine their linear and actual magnetization characteristics. We found that, in a faulty motor, for fixed permeability, the analytic method yields a much larger magnetic flux amplitude than is actually the case. At the same time, the distribution of magnetic flux in the air gap is more asymmetric than the actual case. Here, we present our experimental results and those obtained with the MWF method, using the finite-element analysis package Opera2d 10.5, for two three-phase, four-pole, 60-Hz, 3-hp motors having 36 stator slots and 44 and 28 rotor slots, respectively.