Gram-negative bacilli frequently cause epidemics in high-risk newborn intensive care units. Recently, an epidemic caused by a multiply-resistant K. pneumoniae, serotype 21, occurred in the Vanderbilt University intensive care nursery. The background of this outbreak included an increasing endemic nosocomial sepsis rate, operation of the facility in excess of rated capacity, and increasingly inadequate nurse-to-patient staffing ratios. The epidemic lasted 11 weeks; 26 (12%) of the 232 infants at risk in the unit became colonized. Five infants developed systemic illness and one died. Cohorting, reinforcement of strict handwashing and isolation procedures, and closure of the unit to outborn admissions resulted in rapid termination of the outbreak. Followup studies performed on infants colonized with the epidemic bacterium demonstrated persistent fecal shedding up to 13 months following discharge from the hospital. This epidemic had a detrimental influence on high-risk newborn and obstetric health care delivery in an area encompassing portions of three states. Under a system of progressively more sophisticated referral units, nosocomial infections occurring at a tertiary center can have an impact on other hospitals within the network.