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This paper presents a novel approach to induction motor current signature analysis based on wavelet packet decomposition (WPD) of the stator current. The novelty of the proposed method lies in the fact that by using WPD method the inherent nonstationary nature of stator current can be accurately considered. The key characteristics of the proposed method are its ability to provide feature representations of multiple frequency resolutions for faulty modes, ability to clearly differentiate between healthy and faulty conditions, and its applicability to nonstationary signals. Successful implementation of the system for two types of faults, i.e., rotor bar breakage and air-gap eccentricity is demonstrated here. The results are validated based on both simulation and experiments of a 5-hp induction motor.