The objective of this study was to assess the cost-utility of renal transplantation compared with dialysis. To accomplish this, a prospective cohort of pre-transplant patients were followed for up to two years after renal transplantation at three University-based Canadian hospitals. A total of 168 patients were followed for an average of 19.5 months after transplantation. Health-related quality of life was assessed using a hemodialysis questionnaire, a transplant questionnaire, the Sickness Impact Profile, and the Time Trade-Off Technique. Fully allocated costs were determined by prospectively recording resource use in all patients. A societal perspective was taken. By six months after transplantation, the mean health-related quality of life scores of almost all measures had improved compared to pre-transplantation, and they stayed improved throughout the two years of follow up. The mean time trade-off score was 0.57 pre-transplant and 0.70 two years after transplantation. The proportion of individuals employed increased from 30% before transplantation to 45% two years after transplantation. Employment prior to transplantation [relative risk (RR) = 23], graft function (RR 10) and age (RR 1.6 for every decrease in age by one decade), independently predicted employment status after transplantation. The cost of pre-transplant care ($66,782 Can 1994) and the cost of the first year after transplantation ($66,290) were similar. Transplantation was considerably less expensive during the second year after transplantation ($27,875). Over the two years, transplantation was both more effective and less costly than dialysis. This was true for all subgroups of patients examined, including patients older than 60 and diabetics. We conclude that renal transplantation was more effective and less costly than dialysis in all subgroups of patients examined.