Water shortage is a chronic problem in arid Northwest China. The rapid population growth and expanding urbanization as well as potential climate change impacts are likely to worsen the situation, threatening domestic, irrigation, and industrial supplies and even the survival of the ecosystems in Northwest China. This paper describes the preliminary work of adapting the Distributed Large Basin Runoff Model (DLBRM) to the Heihe watershed (the second largest inland river in arid Northwestern China, with a drainage area of 128,000 km2) for understanding distribution of glacial-snow melt, groundwater, surface runoff, and evapotranspiration, and for assessing hydrological impacts of climate change and glacial recession on water supply in the middle and lower reaches of the watershed. Preliminary simulation results show that the Qilian Mountain in the upper reach area produces most runoff in the Heihe watershed. The simulated daily river flows during the period of 1990-2000 indicate that the Heihe River discharges about 1×109 m3 of water from the middle reach (at Zhengyixia Station) to lower reach, with surface runoff and interflow contributing 51 and 49 percent respectively. The sandy lower soil zone in the middle reach has the highest evapotranspiration rate and also contributes nearly half of the river flow. Work underway focuses on the DLBRM model improvement and incorporation of the climate change and management scenarios to the hydrological simulations in the watershed.