Fault-Tolerant Control (FTC) is an emerging area of engineering and scientific research that integrates prognostics, health management concepts and intelligent control. Impact Technologies and the Georgia Institute of Technology, propose to build off of a strong foundation in fault-tolerant control (FTC) research performed with NASA in past years to mature the applicability of this technology and push the envelope on the capability and breadth of the technology itself. We are introducing for this purpose two novel concepts to expand the scope of fault tolerance and improve the safety and availability of such critical assets. Building upon the successes of Phase I, we will develop and apply to the hovercraft (a targeted testbed) a reconfigurable control strategy that relies on current prognostic information to maintain the platform's stable operation and complete its mission successfully. The second innovation to be introduced refers to a challenging problem encountered in complex systems such as aircraft platforms: A multitude of critical system components can not be monitored directly due to a lack of appropriate sensing modalities. We will introduce a Model Based Reasoning approach and frequency demodulation tools to resolve the ambiguity and "unmask" those fault variables that can not be observed directly.