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Objectives - This study estimates household costs for treatment of pneumonia, severe pneumonia and very severe febrile disease. Combined with reported costs from the health care provider perspective, an estimate of the overall financial burden of these diseases has been developed for the Northern Areas of Pakistan. Methods - Data on the duration and economic implications of the illnesses for households were collected from caretakers of children under 3 years of age enrolled in a surveillance study who sought care at a health facility. Trained study physicians and health workers identified children with pneumonia, severe pneumonia and very severe febrile disease—as defined by protocols for the Integrated Management of Childhood Illness (IMCI). Results - From January to December 2002, 141 health facility visits for pneumonia (n = 41, 29%), severe pneumonia (n = 65, 46%) and very severe febrile disease (n = 35, 25%) were recorded for 112 children who sought care at various levels of health facilities in the Northern Areas of Pakistan. The total societal average cost per episode was US$22.62 for pneumonia, US$142.90 for severe pneumonia and US$62.48 for very severe febrile disease. For household expenditures, medicines constituted the highest proportion (40.54%) of costs incurred during a visit to the health facility, followed by meals (23.68%), hospitalization (13.23%) and transportation (12.19%). Conclusion - Pneumonia is one of the leading killers of children in Pakistan with a correspondingly high economic burden to society. The results of this study suggest that there is a strong economic justification for expanding the availability of existing interventions to fight pneumonia, and for introducing measures such as vaccines to prevent pneumonia episodes.