A new variational inequality formulation for seepage problems with free surfaces is presented, in which a boundary condition of Signorini's type is prescribed over the potential seepage surfaces. This makes the singularity of seepage points eliminated and the location of seepage points determined easily. Compared to other variational formulations, the proposed formulation can effectively overcome the mesh dependency and significantly improve the numerical stability. A very challenging engineering example with cornplicated geometry and strong inhomogeneity is investigated in detail. Copyright (c) 2005 John Wiley & Sons, Ltd.