This correspondence presents an approach to the detection and isolation of component failures in large-scale systems. In the case of sensors that report at rates of 1 Hz or less, the algorithm can be considered real time. The input is a set of observed test results from multiple sensors, and the algorithm's main task is to deal with sensor errors. The sensors are assumed to be of threshold test (pass/fail) type, but to be vulnerable to noise, in that occasionally true failures are missed, and likewise, there can be false alarms. These errors are further assumed to be independent conditioned on the system's diagnostic state. Their probabilities, of missed detection and of false alarm, are not known a priori and must be estimated (ideally along with the accuracies of these estimates) online, within the inference engine. Further, recognizing a practical concern in most real systems, a sparsely instantiated observation vector must not be a problem. The key ingredients to our solu...