This dissertation presents a stochastic framework for modeling the degradation processes of components in complex engineering systems using sensor based signals. Chapters 1 and 2 discuses the challenges and the existing literature in monitoring and predicting the performance of complex engineering systems. Chapter 3 presents the degradation model with the absorbing failure threshold for a single unit and the RLD estimation using the first-passage-time approach. Subsequently, we develop the estimate of the RLD using the first-passage-time approach for two cases: information prior distributions and non-informative prior distributions. A case study is presented using real-world data from rolling elements bearing applications. Chapter 4 presents a stochastic methodology for modeling degradation signals from components functioning under dynamically evolving environmental conditions. We utilize in-situ sensor signals related to the degradation process, as well as the environmental conditions, to predict and continuously update, in real-time, the distribution of a component’s residual lifetime. Two distinct models are presented. The first considers future environmental profiles that evolve in a deterministic manner while the second assumes the environment evolves as a continuous-time Markov chain. Chapters 5 and 6 generalize the failure-dependent models and develop a general model that examines the interactions among the degradation processes of interconnected components/subsystems. In particular, we model how the degradation level of one component affects the degradation rates of other components in the system. Hereafter, we refer to this type of component-to-component interaction caused by their stochastic dependence as degradation-rate-interaction (DRI). Chapter 5 focuses on the scenario in which these changes occur in a discrete manner, whereas, Chapter 6 focuses on the scenario, in which DRIs occur in a continuous manner. We demonstrate that incorporating the effects of component interactions significantly improves the prediction accuracy of RLDs. Finally, we outline the conclusion remarks and a future work plan in Chapter 7.