The state of the art in advanced condition monitoring of aerospace systems continues to make significant strides, fueled by revolutionary new technologies in micro-sensing, optical methods, as well as software driven diagnostic techniques. Demand for better health monitoring solutions also continuous to grow, along with the increasing complexity of systems. The life cycle cost of these solutions must be considered carefully to provide an optimal design. The challenge to the system designer is to understand the requirements of the system and the associated risks, in order to properly match the monitoring solutions to the mission-driven need.This paper focuses on a methodology for thorough risk assessment of the target system, derived from top-level requirements, as the rational basis for selection and design of condition monitoring subsystems. The payoffs include an effective monitoring subsystem design and a proper trade-off between life-cycle cost and risk.