Background: There are no data on the feasibility and cost-effectiveness of using second-line drugs to treat patients with chronic tuberculosis, many of whom are infected with multidrug resistant (MDR) strains of Mycobacterium tuberculosis, in low or middle-income countries. Methods: A national programme to treat chronic tuberculosis patients with a directly observed standardised 18-month daily regimen, consisting of kanamycin (3 months only), ciprofloxacin, ethionamide, pyrazinamide, and ethambutol, was established in Peru in 1997. Compliance and treatment outcomes were analysed for the cohort started on treatment between October, 1997, and March, 1999. Total and average costs were assessed. Cost-effectiveness was estimated as the cost per DALY gained. Findings: 466 patients were enrolled; 344 were tested for drug susceptibility and 298 (87%) had MDR tuberculosis. 225 patients (48%) were cured, 57 (12%) died, 131 (28%) did not respond to treatment, and 53 (11%) defaulted. Of the 413 (89%) patients who complied with treatment, 225 (55%) were cured. Among MDR patients, resistance to five or more drugs was significantly associated with an unfavourable outcome (death, non-response to treatment, or default; odds ratio 3.37, 95% CI 1.32-8.60; p=0.01). The programme cost US$0.6 million per year, 8% of the National Tuberculosis Programme budget, and US$2381 per patient for those who completed treatment. The mean cost per DALY gained was $211 ($165 at drug prices projected for 2002). Interpretation: Treating chronic tuberculosis patients with high levels of MDR with second-line drugs can be feasible and cost-effective in middle-income countries, provided a strong tuberculosis control programme is in place.