The characteristics of the waves at the interface during oil-water flow when drops are formed and entrainment of one phase into the other starts were studied both theoretically and experimentally. Theoretically a model was developed based on Kelvin-Helmholtz instability that included surface tension and predicted critical wave amplitude that leads to entrainment for a specific wavelength. Experimentally wave characteristics before and at the onset of entrainment were investigated by measuring the instantaneous fluctuation of the interface between oil (6mPas, 828kg/m3) and water in a 0.038m diameter stainless steel pipe using a conductivity probe. It was found that the critical wave amplitude decreases with increasing wavelength. Also as the difference in velocity between the two phases decreases the critical wave amplitude increases. The model was able to predict the wave amplitude at the onset of entrainment when an experimental wave velocity was used.