To ensure the reliability of power supply it becomes necessary to periodically monitor the condition of power apparatus. Conventionally this may be achieved by carrying out tests such as the partial discharge and dissipation factor tests in a laboratory. This method, however, requires that the apparatus in question be disconnected from service and transported to the testing location. In the last few years on-line diagnostic tests have found favour not only because they are cost effective but also do not involve service interruption and furthermore offer the possibility of continuous monitoring. The reported methods measure the phase difference between voltage and current digitally by converting the signals to rectangular waveforms while preserving zero crossings. The method discussed in this paper uses a different technique. The Discrete Fourier Transform (DFT) is performed on the acquired analog signals; the phase difference is found from phase information of the fundamental quantities. This procedure effectively eliminates errors due to harmonics. It has an additional advantage in that the error introduced due to noisy data is smaller than that present in a method which relies on detection of zero crossings. The suggested method has been validated by comparison with the results obtained by a conventional bridge measurement. The effects of sampling rate and system frequency fluctuation on the measurement have also been studied.