Complex engineering systems require efficient on-line fault diagnosis methodologies to improve safety and reduce maintenance costs. Traditionally, diagnosis approaches are centralized, but these solutions do not scale well. Also, centralized diagnosis solutions are difficult to implement on increasingly prevalent distributed, networked embedded systems. This paper presents a distributed diagnosis framework for physical systems with continuous behavior. Using Possible Conflicts, a structural model decomposition method from the Artificial Intelligence model-based diagnosis (DX) community, we develop a distributed diagnoser design algorithm to build local event-based diagnosers. These diagnosers are constructed based on global diagnosability analysis of the system, enabling them to generate local diagnosis results that are globally correct without the use of a centralized coordinator. We also use Possible Conflicts to design local parameter estimators that are integrated with the local diagnosers to form a comprehensive distributed diagnosis framework. Hence, this is a fully distributed approach to fault detection, isolation, and identification. We evaluate the developed scheme on a four-wheeled rover for different design scenarios to show the advantages of using Possible Conflicts, and generate on-line diagnosis results in simulation to demonstrate the approach.