This paper describes the economic issues associated with the introduction of telemedicine systems and the main challenges to their evaluation. An approach to the economic evaluation of telemedicine is described based on a cost-consequence framework. The paper links these costs and consequences more formally within a set of evaluative questions which in turn forms the basis for an economic model for evaluating telemedicine. By outlining the key questions, a number of issues relevant to the evaluation of telemedicine are identified and considered. The main challenges to the economic evaluation of telemedicine include: constantly changing technology; lack of appropriate study design to manage the frequently inadequate sample sizes; inappropriateness of the conventional techniques of economic evaluation; and the valuation of health and non-health outcomes. The present study addresses these challenges and suggests ways of advancing the techniques for the economic evaluation of telemedicine.