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This paper presents a new approach to failure detection and isolation (FDI) for systems modeled as an interconnection of subsystems that are each subject to parametric faults. This paper develops the concept of a diagnostic model and the concept of a fault emulator which are used to model and parameterize subsystem faults. There are two stages to the FDI scheme. In the first stage there is a requirement to identify the diagnostic model. Once identified, the diagnostic model is used in the second stage to generate a residual. Artifacts within the measured residual are then used as a basis for identifying parametric faults. The scheme is distinct from others as it does not require an online recursive least squares type identifier.