The fundamental knowledge of fatigue damage mechanism is necessary for understanding manufacturing process effects. However, the artificial defects on the test samples in traditional fatigue tests will change the surface integrity and therefore may not reflect the nature of fatigue damage. This paper studies the fatigue damage resulting from real-life rolling contact tests and finite element analysis of AISI 52100 steel and identifies the possible mechanisms for fatigue failure in the presence of process induced surface integrity. Rolling contact fatigue damage was real-time monitored using an acoustic emission (AE) sensor. Surface and subsurface fatigue damage of the samples was then characterized using optical and scanning electron microscopy (SEM) and surface profiling. The results suggest that shear stress induced Mode II crack is the dominant fatigue mechanism. Two types of subsurface cracks were observed: main cracks that propagate parallel to the surface due to subsurface shear stress induced fracture/debonding of inclusions or second phase particles. Shear stress induced surface cracks propagate at shallow angles (∼35°) from the surface. Branching cracks eventually form and connect the main crack to surface, The formation of main cracks and surface cracks may be parallel processes, and spalling occurs as a combined effect of the main, surface, and branching cracks. The relationship between AE signals and fatigue damage was been established.