To determine the outcome at 1 year of neonatal encephalopathy (NE) and to estimate the possible contribution of birth asphyxia to childhood disability in a low-income South Asian country, a prospective cohort study was undertaken in the principal maternity hospital of Kathmandu, where over 50% of local women give birth. From a total population cohort of 21609 live births, 131 term infants with NE (after exclusion of cases associated with neonatal sepsis, congenital malformations, or primary hypoglycaemia) and 208 term control infants were recruited. Of these, 102 (78%) infants with NE and 106 (51%) control infants were followed-up to 1 year of age. Outcome measures were death or neurodevelopmental impairment, graded as major, minor or none. Of the 131 term infants with NE, 83 were graded with moderate or severe NE according to conventional definition. By 1 year of age, 45 (44%) of the infants with NE had died, 18 (18%) had severe impairments, and two (2%) had minor impairments; four (4%) of the control subjects had died and two (2%) had minor impairments. Most deaths in subjects with NE occurred in the early neonatal period; NE carried no excess risk of death beyond the neonatal period. Of the 18 children with major impairment, 14 (78%) had spastic tetraplegic cerebral palsy and eight (44%) had multiple impairments. Compared with the control group the relative risk of death by 1 year was 5 (95% CI 1.4 to 15) for mild NE, 8 (95% CI 3 to 23) for moderate, and 26 (95% CI 10 to 67) for severe. Twenty-seven of 38 (71%) infants with moderate NE either died or survived with major impairment. An upper estimate for the prevalence of major neuroimpairment at 1 year attributable to birth asphyxia is 1 per 1000 live births in this population.