In most machining processes, large amounts of energy are needed to accomplish the machining operation. When this energy is transmitted through a structure that has minimal damping characteristics, such as a lathe or a milling machine, self sustained oscillations (chatter) can develop. When chatter develops, it can be viewed as a basic performance limitation of the machine tool. In order to suppress the chatter, a real-time controller using digital signal processing techniques has been implemented. This paper discusses a novel way of computing the transfer function of the machine tool-work piece combination and illustrates how a real-time active chatter controller could be designed and integrated into existing machine tools to overcome this performance limitation. Currently, experimental verification of the analytical work is being pursued.