Neural networks-based fault diagnosis algorithm to detect and isolate faults in the nonlinear systems is proposed. In the proposed method, the fault is detected when the errors between the system output and the multilayer neural network-based nominal model output cross a Predetermined threshold. Once a fault in the system is detected, the system outputs are transferred to the fault classifier by nultilayer/ART2 NN (adaptive resonance theory 2 neural network) for fault isolation. From the computer simulation results, it is verified that the proposed fault diagonal method can be performed successfully to detect and isolate faults in a nonlinear system.