The paper outlines recent advances of the theory of observer-based fault diagnosis in dynamic systems towards the design of robust techniques of residual generation and residual evaluation. Emphasis will be placed upon the latest contributions using frequency domain techniques including H∞ theory, nonlinear unknown input observer theory, adaptive observer theory, artificial intelligence including fuzzy logic, knowledge-based techniques and the natural intelligence of the human operator. Two representative examples illustrate the efficiency of the observer-based approach.