A method and system for fault isolation within a network element in an optical network is described. A single fault in the system can give rise to multiple alarms detected at multiple points. Finding the root cause alarm corresponding to the fault that has triggered these alarms is important for fault isolation and is the focus of attention for this invention. The network element is modeled by a directed acyclic graph that captures the interactions among various components in the network element. Using a graph-based technique the invention analyzes the various topological faults raised and their locations for identifying root cause alarms and masking all correlated alarms.