In order to reveal the propagation characteristics of acoustic emission (AE) signals in the body of industrial machinery, the characteristic frequencies and wave speeds of AE signals propagated on the interior and exterior surfaces (IS and ES) of the body were extracted. Subsequently, an algorithm utilizing characteristic frequency and time difference of arrival (TDOA) is proposed for the identification and localization of AE sources. Initially, an AE source is induced on the IS and ES of the body using the pencil-lead break method in accordance to ASTM standards, and the AE signal is captured by two piezoelectric sensors at a sampling frequency of 3 MHz. Then, to avoid the limitations of wavelet decomposition using self-selected wavelet scale and the problem that a single indicator cannot properly evaluate the correlation between independent mode functions (IMFs) with the original signal, this paper will conduct 4-layer wavelet decomposition of the original signal according to the response frequency range of the sensor, and select the wavelet details within the stable range of the response frequency of the sensor for preliminary reconstruction,and then the empirical mode decomposition (EMD) method is used to decompose the de-noised AE signal into 7 IMFs, and the AE waveform is reconstructed by the combined information of correlation coefficient and variance accounted for. Secondly, the reconstruction method combined with EMD analysis and a single index is compared with the proposed method in this paper to verify the reliability of the proposed method. In addition, the frequency domain characteristics of AE signal propagation process on the IS and ES of the body are extracted. Finally, based on the TDOA principle, the propagation speed of AE signal on the IS and ES of the body is calculated. Based on the geometric relationship between the AE source and two sensors, an algorithm for the location of the AE source is proposed. The results show that the proposed signal reconstruction method can effectively extract the features of AE signals, and the average positioning accuracy of the localization algorithm based on characteristic frequency and TDOA reaches 0.86%.