OBJECTIVE To evaluate the effect of treating children with influenza with oseltamivir on health outcomes and costs to healthcare payers. PATIENTS AND DESIGN Health outcome data from the oseltamivir paediatric clinical development programme plus data from the literature were used in an economic model developed to predict morbidity and mortality due to influenza and its specified complications. Published data on the cost of care in the UK were used to compare oseltamivir with usual care in children aged 1-12 and 1-5 years by estimating cost-effectiveness and cost-utility ratios. RESULTS Oseltamivir reduced median time to return to normal health and activity by almost 2 days (40% reduction, 67.1 vs 111.7 hours; p < 0.0001) versus placebo. In children aged 1-5 years, a 48% reduction (63.5 vs 121.3 hours; p = 0.0003) was observed. Oseltamivir-treated children who developed otitis media returned to normal health and activity 30% faster (99.6 vs 141.5 hours; p = 0.0517) than the placebo group. In the economic model, oseltamivir in the base-case analysis (assuming 60% diagnostic accuracy, full compliance, and 100% receive and start treatment within 48 hours, standard discounting according to the UK National Institute of Clinical Excellence guidelines) resulted in favourable cost-utility ratios in children aged both 1-12 and 1-5 years, with incremental cost-utility rates of £11 173/quality-adjusted life year (QALY) and oseltamivir being dominant compared with usual care, respectively (year of costing, 2002). Even in conservative scenarios, most cost-utility ratios remained <£30 000/QALY. CONCLUSIONS Oseltamivir is an effective treatment for children with influenza, allowing faster return to normal health and activity compared with usual care. From the healthcare payer perspective, oseltamivir is a potentially cost-effective strategy for otherwise healthy children.