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This paper presents the results of our study of the permanent-magnet synchronous motor (PMSM) running under demagnetization. We examined the effect of demagnetization on the current spectrum of PMSMs with the aim of developing an effective condition-monitoring scheme. Harmonics of the stator currents induced by the fault conditions are examined. Simulation by means of a two-dimensional finite-element analysis (FEA) software package and experimental results are presented to substantiate the successful application of the proposed method over a wide range of motor operation conditions. Methods based on continuous wavelet transform (CWT) and discrete wavelet transform (DWT) have been successfully applied to detect and to discriminate demagnetization faults in PMSM motors under nonstationary conditions. Additionally, a reduced set of easy-to-compute discriminating features for both CWT and DWT methods has been defined. We have shown the effectiveness of the proposed method by means of experimental results.