The dynamics and diagnostics of rotor with vaults have been gaining importance in recent years. In the present study a model-based method is proposed for the on-line identification of faults In a rotor. The fault-induced change of the rotor system is taken into account by equivalent loads in the mathematical model. The equivalent loads are virtual forces and moments acting on the linear undamaged system to generate a dynamic behaviour identical to the measured one of the damaged system. The rotor has been modelled using FEM. Each fault has been identified for its size and location on the shaft for transient and steady rotors. The nature and symptoms of the fault are ascertained using FFT or Wavelet transforms. For on-line rotor fault identification a combined (hybrid) model and signal-based approach is suggested.