Abstract: A sensor system is operable for detecting the presence of water in an oil emulsion inside the lower gear unit of a marine engine, and for providing an alarm signal when the presence of water is detected within the gear unit. The sensor system includes a ring oscillator circuit and a symmetrical array of passive input probes which are disposed in the oil/water emulsion inside the oil chamber. Each of the passive input probes is electrically connected to the ring oscillator circuit wherein the probes function as fixed capacitors for measuring the electrical characteristics of the emulsion. When a voltage is applied to the oscillator circuit, the oscillator circuit generates an oscillating signal that circulates at a frequency which varies according to the dielectric-properties of the liquid emulsion. When water is introduced into the chamber, the water is emulsified with the oil thereby changing the electrical characteristics of the oil.