Automated tolerance analysis is one of the most critical problems for computer aided process planning (CAPP) systems to be applied in the real manufacturing environment. The traditional way in CAPP uses only designed shape and dimensions to generate an operation sequence and then uses dimensional tolerance chain to check the generated operation sequence. Neither setups nor datum elements are clearly specified. How to use computers to automatically generate feasible and optimal operation sequence with specified datum elements and setups according to designed dimensional and geometric tolerances has not been well addressed. In this paper, an innovative approach of automated tolerance analysis for selection of setups and datums for CAPP systems is introduced. The tolerance specifications (both dimensional and geometric) will be analyzed for setup and datum selection and fixture design. Finally the operation sequence will be implemented based on the setup and datum selection.