To determine why something has stopped working, its useful to know how it was supposed to work in the first place. That simple observation underlies some of the considerable interest generated in recent years on the topic of model-based reasoning, particularly its application to diagnosis and troubleshooting. This paper surveys the current state of the art, reviewing areas that are well understood and exploring areas that present challenging research topics. It views the fundamental paradigm as the interaction of prediction and observation, and explores it by examining three fundamental subproblems: Generating hypotheses by reasoning from a symptom to a collection of components whose misbehavior may plausibly have caused that symptom; testing each hypothesis to see whether it can account for all available observations of device behavior; then discriminating among the ones that survive testing. We analyze each of these independently at the knowledge level i.e., attempting to understand what reasoning capabilities arise from the different varieties of knowledge available to the program. We find that while a wide range of apparently diverse model-based systems have been built for diagnosis and troubleshooting, they are for the most part variations on the central theme outlined here. Their diversity lies primarily in the varying amounts of kinds of knowledge they bring to bear at each stage of the process; the underlying paradigm is fundamentally the same.