Background: The cost and value of tertiary level care, of newborns admitted to the Neonatal Intensive Care Units (NICUs) in developing countries has often been questioned. Objectives: To determine the economic cost of neonatal intensive care to the hospital and directly to parents. Design: Cost analysis. Setting: A government sponsored and funded Level III NICU. Methods: Systemic estimation of capital and recurrent costs of NICU care. Capital cost included the cost of building (land, construction, air conditioning), equipment, fixed assets and opportunity cost. Recurring cost included salaries, maintenance of building and equipment, utilities, laundry, drugs, disposables, formula milk, blood products and laboratory investigations, etc. To calculate cost per baby, the 35 consecutively admitted neonates (VLBW 13, others 22) were prospectively followed and the cost determined from the hospital budgetary perspective. In addition, 20 parents whose neonates were admitted to the NICU were interviewed to assess direct costs born to them. Results: Cost of caring of a NICU admission was Rs.2158 (US $60) per day, which consisted of cost to the hospital (Rs. 1902, US $53) and cost of drugs/disposables purchased by parents(Rs.254, US $7) to supplement the hospital supplies. Salaries of the personnel constituted the largest component of the overall cost (28.7%), three-fourths of which (21.2%) was spent on nurses' salaries alone. Other constituents of the cost were: capital investment (23.7%), drugs and disposables (22.8%), investigations (7.3%) and miscellaneous recurrent costs (17.4%). Total cost of care per survivor was Rs.2312 (US $65) per day. Total cost of care of a VLBW neonate was Rs.50130 (US $1400). Conclusion: The cost of NICU care in this hospital was considerably less than anticipated and than is reported for the more developed countries.