This study examined children with an acute encephalopathy illness for evidence of viral infection, disordered blood–brain barrier function, intrathecal immunoglobulin synthesis, and interferon (IFN) production, and related their temporal occurrence to outcome. A prospective study of 22 children (13 males, 9 females; age range 1mo to 13y, median 2y 4mo), recorded clinical details, with serum and cerebrospinal fluid (CSF) analysis near presentation and then on convalescent specimens taken up to day 39 of the neurological illness. Outcome was assessed with standard scales between 18 months and 3 years after presentation. A history consistent with viral infection was given in 17 children but laboratory evidence of viral infection was found in only 7 (7/17). In 18 out of 21 children, an elevated CSF:serum albumin ratio indicative of impairment of the blood–CSF and blood–brain barriers was detected at some stage of the illness. In 14 of the 15 children with a raised immunoglobulin G index, and in 12 of the 14 children where the CSF was positive for oligoclonal bands, this was preceded by, or was observed at the same time as, an abnormal albumin ratio. Sixteen children (16/18) had elevated IFN-α levels in serum, or CSF, or in both. We conclude that these findings indicate an initial disruption of the blood–brain barrier followed by intrathecal antibody production by activated lymphocytes, clonally restricted to a few antigens. This is the first in vivo study to show this as an important pathogenetic mechanism of encephalitis in children. Poor outcome was associated with young age, a deteriorating electroencephalogram pattern from grade 1 to grade 2, and the degree of blood–brain barrier impairment, particularly when prolonged, but not with Glasgow Coma Scale score. The persistence of IFN-α was associated with a good prognosis.