To evaluate nosocomial transmission of multidrug-resistant (MDR) tuberculosis (TB). Outbreak investigation: review of infection control practices and skin test results of healthcare workers (HCWs); medical records of hospitalized TB patients and mycobacteriology reports; submission of specimens for restriction fragment length polymorphism (RFLP) typing; and an assessment of the air-handling system. A teaching hospital in upstate New York. Skin-test conversions occurred among 46 (6.6%) of 696 HCWs tested from August through October 1991. Rates were highest on two units (29% and 20%); HCWs primarily assigned to these units had a higher risk for conversion compared with HCWs tested following previous incidents of exposure to TB (relative risk [RR] = 53.4, 95% confidence interval [CI95] = 6.9 to 411.1; and RR = 37.4, CI95 = 5.0 to 277.3, respectively). The likely source patient was the only TB patient hospitalized on both units during the probable exposure period. This patient appeared clinically infectious, was associated with a higher risk of conversion among HCWs providing direct care (RR = 2.37; CI95 = 1.05 to 5.34), and was a prison inmate with TB resistant to seven antituberculosis agents. The MDR-TB strain isolated from this patient also was isolated from other inmate and noninmate patients, and a prison correctional officer exposed in the hospital. Mycobacterium tuberculosis isolates from all of these patients had matching RFLP patterns. Infection control practices closely followed established guidelines; however, several rooms housing TB patients had marginal negative pressure with variable numbers of air changes per hour, and directional airflow was disrupted easily. These data strongly suggest nosocomial transmission of MDR-TB to HCWs, patients, and a prison correctional officer working in the hospital. Factors contributing to transmission apparently included prolonged infectiousness of the likely source patient and inadequate environmental controls. Continued urgent attention to TB infection control is needed.