Many proposed formation flying missions seek to advance the state of the art in spacecraft science imaging by utilizing dual-spacecraft precision formation flying (PFF) to enable a 'virtual' telescope (VT). Using precision dual-spacecraft alignment, very long focal lengths can be achieved by locating the optics on one spacecraft and the detector on the other. Proposed science missions include astrophysics concepts for X-ray imaging and exo-planet observation with large spacecraft separations (1000 km to 80,000 km), and heliophysics concepts for X-ray or extreme ultra-violet (EUV) imaging or solar coronagraphs with smaller separations (50m - 500m). These proposed missions require advances in guidance, navigation, and control (GN&C) for PFF to enable high resolution science imaging. For many applications, the dual-spacecraft dynamics are coupled through the GN&C system when the relative ranging and position alignment sensor components are not co-located with their respective spacecraft mass centers. We develop a model-based PFF system design approach for the VT application, considering the coupling inherent in precision dual-spacecraft inertial alignment. These systems employ a variety of GN&C sensors and actuators, including laser-based alignment and ranging systems, camera-based imaging sensors, inertial measurement units (IMU), as well as microthruster systems and image motion compensation platforms. Results of a GN&C performance assessment reveal how data from relative position sensors can be employed in a Kalman filter framework to significantly improve alignment estimation performance. The assessment provides a comparison of two different GN&C formation flying architectures, illustrating the performance trades inherent in the choice of PFF system architecture in the VT application.