The fracture type differentiation, quantification, and source identification are desirable and yet intractable in the acoustic emission (AE) testing of a complex coating system. In this letter, a technique combining wavelet transform and conventional AE parameter analysis was developed to study the tensile failure process of thermal barrier coatings in real time. It is demonstrated that the failure of thermal barrier coatings originates from surface vertical cracking and follows interface cracking, and that the AE count increases with tensile load following a power law. The cracking source identified from AE signals agrees well with that observed by optical microscopy. This technique provides a powerful tool for the study of failure processes of a wide range of coatings and thin films.