Phased-Mission Systems (PMS) are widely applied in aerospace, telecommunication and intelligent systems for multiple, consecutive and non-overlapping phases of missions. The phase-dependent stresses and system structure cause some difficulties to the reliability analysis of PMSs. In this paper, we analyze the physical isolation effects on the degradation speeds and across-phase damage accumulations of failure mechanisms. And, some corresponding reliability and unreliability formulas are derived. Besides, a hierarchical Binary Decision Diagram (BDD)-based modeling method is proposed for incorporating functional and physical isolation effects into BDD models, and the analytical method with phase algebras is introduced for studying the failure behavior of PMS with functional dependence. In the case study, we evaluate the collision avoidance system of a fixed-wing unmanned aerial vehicle as an example to demonstrate the proposed modeling and analysis method. Results show that the physical isolation effects have significant influences on the degradations of components, which deserves detailed analysis for a more practical and realistic PMS’s failure behavior.