This paper presents tool wear monitoring with laser measuring instrument and tool wear compensation in milling process. Tool wear on the side cutting edge is monitored by the change of diameter of milling cutter. Laser measuring instrument measures diameter of milling cutter which rotates during air cutting time. Sequential prediction of tool wear and sequential determination of monitoring interval are discussed to apply the monitoring approach to practical use. Tool wear compensation system is developed with the monitoring approach to keep radial depth of cut constant. Tool wear compensation is shown in a peripheral milling operation.