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This work focuses on vehicle lateral control for automated highway systems (AHSs) studied as a part of the California Partners for Advanced Transit and Highways (PATH) Program. In the PATH lateral control system, magnetometers are installed under both front and rear bumpers of the vehicle; these magnetometers measure the lateral deviation of the vehicle relative to the magnets buried along the centerline of each automated lane. Lateral controllers have been designed and tested successfully provided that there is no fault in magnetometers. It has been argued that these controllers are NOT tolerant to the fault in magnetometers. The focus of This work is the degraded-mode lateral control under fault in rear magnetometers. The aim of the controller design is to accomplish adequate performance with the remaining set of magnetometers, the front magnetometers. The effects of the fault are examined, and the significance of the linear time-varying (LTV) property of the front-magnetometer-based vehicle lateral dynamics is recognized. Popular control methods for LTV systems generally involve gain scheduling by switching between several linear time-invariant (LTI) controllers. Such methods are complicated and it is difficult to prove the stability of the switching mechanism. To derive a simple effective LTV controller, feedback linearization is applied to approximately cancel out the time-varying terms in the plant and to function as a gain scheduler. However, due to the weakly damped zeroes of the plant, feedback linearization with state feedback or matched observer state feedback results in weakly damped internal dynamics. In order to tune the internal dynamics, a mismatched observer is designed based on H-infinity optimal control techniques. Experimental results are presented to show the effectiveness of the controller design.