A multi-functional heat-pump system utilizing the ambient air and gray water as heat source and sink has been optimized for heating and cooling of residential buildings, respectively. This optimization is made based on an existing prototype of the multi-functional heat pump system in the authors' previous study [1,2]. The optimized prototype consists of a heat pump system and a hot water supply system. The prototype is set in two environmental chambers that they simulate the outdoor and indoor environments, respectively, for performance testing. The system was designed to allow four combinations of a water-source evaporator and an air-source evaporator acted as heat sources in space and/or hot water heating modes. The four combinations consist of (a) air-source-only, (b) water-source-only, (c) air-and-water-sources-in-parallel, and (d) air-and-water-sources-in-series, in the refrigerant cycle. In this paper, the drawbacks of the initial prototype in heating mode are discussed and the modifications are proposed. The results show that the performance of optimized prototype superior to that of initial one. The optimized multi-functional heat pump system, compared with initial prototype, can be more practical and provide significant energy savings in space heating and hot water supply. (C) 2013 Elsevier B.V. All rights reserved.