Over the last few years, use of downhole motors have increased dramatically to meet the challenges of horizontal wells and in particular, extended reach drilling, deep and ultra-deep water wells. With these wells pushing the limits of rigs and equipment it is imperative that motors be utilized optimally in the system. More often downhole motor pressure loss calculations are not explicitly included in the overall hydraulic optimization and bit nozzle selection with the available pump power. Generally a motor pressure loss is specified in the optimization calculation and the optimized nozzle sizes are selected. To enhance the method of optimization and make the system more effective, hydraulic optimization is required by taking into consideration various motor and drilling parameters. The key to an improved drilling system is a unified system approach that encompasses motor and bit. This paper presents a new approach to hydraulic optimization by including both the motor and bit. It enables us not only to calculate the optimal flowrate and optimal horsepower of the motor as a function of configuration of the motor but also to select the correct motor configuration. In addition, calculations are made for hydraulic horsepower per square inch encompassing bit and motor. The practical usefulness of the theory, backed by the fundamental and optimal analysis is demonstrated with numerical examples.