This paper uses a modeling and simulation approach in the engineering process of designing a data fusion system for military applications. Fundamental issues in the design of a data fusion system are the selection of appropriate architecture and efficient and dedicated real-time algorithms for the application of interest. Selection of data fusion algorithms is performed using a simulation test bed where realistic modeling of sensor performance is being performed. The test bed also allows the use of multiple algorithms in a dynamic sense based on the particular regime in which the fusion system is operating. This paper first presents the data fusion system engineering guidelines that are being used. Then the paper addresses the complex problem of the tactical picture compilation. Finally the paper shows a case study where the selection of data fusion algorithms is performed for an airborne platform.