In this paper, a new distributed adaptive observer based fault detection and isolation (FDI) approach is developed for an intensified interconnected heat exchanger/reactor. In the distributed FDI architecture, an FDI component is designed for each subsystem in the interconnected system. For each FDI component, multiple adaptive observers, which correspond to the possible faulty parameters of the corresponding subsystem, are designed to monitor the states and derive a local diagnostic decision. Thanks to the parameter estimations provided by the adaptive observers, both local and global faults could be isolated and identified. Simulation results show that this method can quickly and accurately diagnose different types of faults occurring in the interconnected heat exchanger/reactor system.