The aim of this paper is to describe an advanced method of the fault diagnosis using Control Theory with reference to a crack detection, a new way to localize the crack position under influence of the plant disturbance and white measurement noise on a rotating shaft. As the first step, the shaft is physically modelled with a finite element method as usual and the dynamic mathematical model is derived from it using the Hamilton principle and in this way the system is modelled by various subsystems. The equations of motions with a crack are established by the adaption of the local stiffness change through breathing and gaping[1] from the crack to the equation of motion with an undamaged shaft. This is supposed to be regarded as a reference systrm for the given system. Based on the fictitious model of the time behaviour induced from vibration phenomena measured at the bearings, a nonlinear state observer is designed in order to detect the crack on the shaft. This is the elementary NL-observer(EOB). Using the elementary observer, an Estimator(Observer Bank) is established and arranged at the certain position on the shaft. In case, a crack is found and its position is known, the procedure for the estimation of the depth is going to begin.