This paper analyzes various design considerations of a 'smart' rolling element bearing with self-diagnostic capabilities. The self-diagnostic capability was added to the bearing by integrating a condition monitoring module into the raceway. The advantages of this design over a conventional condition monitoring system are discussed. A structural analysis was done to evaluate the effect of various modifications to the bearing raceway. It was found that the raceway of a conventional bearing could accept a miniaturized sensor module without a significant impact to the bearing. A miniaturized acoustic emission sensor was designed to fit into the sensor module. The sensor was designed to respond to the bearing's characteristic frequencies.