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An on-line technique for monitoring the condition of groundwall (GW) and phase-to-phase (PP) insulation for 3 phase AC machine stator windings is proposed in this paper. Insulation condition indicators such as capacitance, dissipation factor (tanδ), and AC insulation resistance are calculated on-line based on the differential leakage current measurements for each phase. A model for a 3 phase AC machine insulation system is derived and analyzed for both off-line and on-line testing. Guidelines for interpreting the measured indicators for determining the 1) overall condition and 2) significant degradation for the individual GW and PP insulation for each phase of the stator are given based on the analysis. Experimental results on a 15 hp induction motor under intentional GW and PP insulation degradation conditions show that incipient insulation degradation can be detected and classified with high sensitivity.