Financial sustainability of rural water systems in the Philippines is evaluated based on a comparison of willingness to pay for improved water and the costs of service delivery. Willingness to pay estimates indicate that user fees are unlikely to be sufficient to cover the full cost of service and subsidies are necessary, at least for a major portion of capital costs, or the water systems will become unsustainable because of insufficient resources. Sustainability is more probable when care is exercised in selecting villages for improved water services. Economies of scale lead to lower unit costs in larger villages. Willingness to pay is greater for household connections than for public faucets. Willingness to pay increases with income and wealth, family size, education, and dissatisfaction with traditional water sources. ¿ American Geophysical Union 1993