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This paper is concerned with the question of servicing warranties for repairable items. During the warranty period, each time an item fails the manufacturer has the obligation to restore the item to operational condition either by repairing the item or by replacing it with a new item. In this paper, we consider repair-replacement strategies based on the condition of the failed item. For products with phase-type lifetime distributions where the phases represent the condition of the item, we develop algorithms to determine the expected cost of servicing a warranty and use it in making the repair-replacement decision. Illustrative numerical examples are presented. We also propose a dynamic strategy by taking the expected remaining warranty cost into consideration.