A large fraction of the physical model tests of the VAPEX process reported in the literature have been conducted without any connate water in the system. The absence of connate water was rationalized by suggesting that it has little or no influence on relative permeability of oil and since the vapourized solvent does not dissolve in water, there is no effect of water on the mass process. However, this ignores the possible contribution of oil spreading at the gas-water interface to the mass transfer and the contribution of film drainage to oil relative permeability at oil saturation. We have evaluated the effect of connate water on VAPEX performance using physical model experiments carried out in a visual model with different connate water saturations. Butane was used as the solvent and Ottawa sand was used for packing the model to obtain permeability and capillary pressure values comparable to field conditions. In addition to the visual observations of the size and shape of the vapour chamber, the rates of oil and gas production were monitored during the experiments. The results show that connate water has a measurable effect on the process, both in terms of the shape of the vapour chamber the drainage rate of the diluted oil. The presence of connate water causes faster spreading of the vapour chamber in the lateral direction and tends to increase the thickness of the mixing zone. This increase in the mixing zone thickness appears to result from capillarity driven fingering phenomenon. The mixing zone had a distinct uneven appearance that was similar to patterns generated frontal instabilities in miscible displacements. The effect of connate water on the drainage rate was an increase in the initial rate, but a reduction in the rate, subsequently. The presence of mobile water speeds up the communication between the two wells and leads to even faster spreading of the vapour chamber.