The most expensive component of a water supply system is the distribution network. Deterioration due to aging and stress causes increased operation and maintenance costs, water losses, reduction in the quality of service, and reduction in the quality of water supplied. In this paper an approach is proposed in which the water distribution network economics and hydraulic capacity are analyzed simultaneously over a predefined analysis period while the deterioration over time of both the structural integrity and the hydraulic capacity of every pipe in the system is explicitly considered. The cost associated with each pipe in the network is calculated as the present value of an infinite stream of costs. In Kleiner et al. a methodology is presented to implement this approach into a decision support system that facilitates the identification of an optimal rehabilitation strategy. ¿ 1998 American Geophysical Union