Adverse drug events (ADEs) are an important problem in all hospitalized patients as these events represent medication-related patient harm. Few epidemiologic data exist regarding ADEs in the pediatric inpatient setting and, in particular, the economic impact of such ADEs upon the healthcare sector. To evaluate the incidence, preventability, and seriousness of ADEs and potential ADEs occurring in hospitalized children and to examine the cost implications of these ADEs. This was a prospective observational cohort study conducted in the pediatric, neonatal intensive care unit (NICU), and postnatal wards of a university-affiliated urban general hospital in Dunedin, New Zealand (NZ). The study population was all patients admitted to these wards for >24 hours over a 12-week period from 18 March 2002 to 9 June 2002. Medication-related events were identified by chart review, attendance at multidisciplinary clinical meetings, parent/carer/child interviews, and voluntary and verbally solicited reports from staff. All suspected medication-related events were reviewed by a panel of three health professionals who independently categorized the events and rated them for seriousness, preventability, and causality, using a standardized reviewer form. Costs attributable to ADEs were calculated using both the average cost of a bed day, and specific costs for diagnostic groupings. The main outcome measures of the study were ADEs and potential ADEs. There were 495 eligible study patients, who had a total of 520 admissions and 3037 patient-days of admission, during which 3160 prescription episodes were written. There were 67 ADEs, of which 38 (56.7%) were classified as preventable, and 77 potential ADEs. ADEs occurred at a rate of 2.1 per 100 prescription episodes, 12.9 per 100 admissions, and 22.1 per 1000 patient-days. Potential ADEs occurred at a rate of 2.4 per 100 prescription episodes, 14.6 per 100 admissions, and 25 per 1000 patient-days. Although the greatest number (and rate per 100 admissions) of ADEs occurred in NICU patients, surgical pediatric ward patients had the greatest rate of ADEs per 1000 patient-days. Few events occurred in postnatal patients. Forty-six percent of ADEs were classified as being serious; 15% were deemed to result in persistent disability or were classified as life threatening. Potential ADEs were deemed more likely to be serious with 82% classified as potentially serious events; 33% were deemed as having the potential to result in persistent disability, or the potential to cause a life-threatening event. Fifteen ADEs were judged to have caused the hospital admission or to have prolonged hospital stay. The total number of days attributed to ADEs was 92 (range 1-26 days); of these, 58 were deemed preventable days and 34 non-preventable days. This extrapolates to a total annual cost of $NZ235 214 (2002 values) to the pediatric service, subdivided into $NZ148 287 for preventable ADEs and $NZ86 927 for non-preventable ADEs. ADEs and potential ADEs represent a considerable hazard for the pediatric inpatient population and ADEs represent a large cost imposition upon the healthcare sector. Over half of the ADEs were deemed preventable. This highlights the importance of developing strategies to prevent and ameliorate ADEs both to improve the quality of patient care and to reduce healthcare costs.