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In condition monitoring (CM) of mechanical drives, the analysis of various physical and chemical properties of the operating lubricant can be used to diagnose defects and assess the state of the system. Recent developments in on-line oil condition sensors and advances in signal processing methods have allowed for a system for on-line oil analysis to be developed and applied in the field of predictive maintenance. The System for On-line Oil Analysis (SOOA) has the ability to measure multiple oil properties of interest and detect faults induced by transients in the acquired signals. Transient detection is based on the cumulative sum of errors (CUSUM) technique, where the error represents the difference between the predicted reference value and the current measured value. Detection of abnormal behaviour, based on transient detection, is followed by fault diagnosis, through integrated assessment of oil properties in real time. The system can operate as a standalone unit with an independent user interface or as a part of a complete integrated diagnostic system, merging oil condition evaluation with vibrational analysis and other techniques. This paper focuses on the algorithms within SOOA in charge of transient detection and fault diagnosis. The results of SOOA operation are presented through a demonstration of the method in a laboratory environment with two different sets of tests: gear pitting and water contamination.