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This paper introduces a systematic design methodology, namely the functional fault analysis (FFA), developed with the goal of integrating SHM into early design of aerospace systems. The basis for the FFA methodology is a high-level, functional model of a system that captures the physical architecture, including the physical connectivity of energy, material, and data flows within the system. The model also contains all sensory information, failure modes associated with each component of the system, the propagation of the effects of these failure modes, and the characteristic timing by which fault effects propagate along the modeled physical paths. Using this integrated model, the designers and system analysts can assess the sensor suitepsilas diagnostic functionality and analyze the ldquoracerdquo between the propagation of fault effects and the fault detection isolation and response (FDIR) mechanisms designed to compensate and respond to them. The Ares I Crew Launch Vehicle has been introduced as a case example to illustrate the use of the Functional Fault Analysis (FFA) methodology during system design.