OBJECTIVE: Tanzania has a policy of free provision of inpatient care for young children in order to promote timely access and thus reduce the current levels of mortality. However, little is known about out-of-pocket costs that may be incurred by families in seeking care for sick children. We conducted this study to identify the magnitude of these costs in relation to family income. METHODS: Five hundred and ten caretakers were interviewed on the day of discharge of their child from 11 hospitals in north-east Tanzania. Caretakers were asked to report expenditure related to hospitalization in various categories and family wealth was assessed through reported expenditure in the previous month. RESULTS: Food (mean US$2.2, median US$1.6), transport (mean US$1.7, median US$0) and medicines (mean US$1.0, median US$0.4) were the leading categories of expenditure, and overall the mean out-of-pocket expenditure was US$5.5 (median US$3.7) per admission. Mean out-of-pocket expenditure was more than 1.5 times higher for households in the highest monthly expenditure quintile compared with those in the lowest. However, this differential was reversed when expenditure was considered as a proportion of family expenditure in the previous month; for the lowest quintile, families spent more than three-quarters of their total monthly expenditure on a single paediatric admission. CONCLUSION: Out-of-pocket expenditure on child hospitalization places a considerable burden on poor families. Our findings justify a closer scrutiny of how this expenditure could be reduced, particularly through the provision of adequate food for both children and caretakers and through reducing stock-outs of essential medicines.