This paper covers the modelling of an Integrated Prognostics Observer for real-time condition monitoring of the dry clutch system and gearbox used on Automated Manual Transmission (AMT). The real time sensor data of the clutch actuator and gear actuator piston positions are analysed for monitoring the condition of the clutch system and gearbox synchroniser. Original parameters of the new clutch and gearbox hardware are stored in the Electrically Erasable Programmable Read-only Memory (EEPROM) of the AMT controller and the real time data is used by the integrated prognostics observer for assessing the degradation/wear. Clutch slip during torque transmission and the synchronization time are continuously monitored for providing timely alert for re-calibration of the AMT system. Thus, Condition monitoring of an AMT system provides enhanced prognostic functionality which ensures consistent clutch performance, gear shift quality and timely warning for recalibration, repair and/or replacement of the critical wear and tear parts. Also, systematic analysis of the monitored data provides an accurate diagnosis of a developing fault.