OBJECTIVE: To determine the incidence of foot ulcers in a large cohort of patients with diabetes, the risk of developing serious complications after diagnosis, and the attributable cost of care compared with that in patients without foot ulcers. RESEARCH DESIGN AND METHODS: Retrospective cohort study of patients with diabetes in a large staff-model health maintenance organization from 1993 to 1995. Patients with diabetes were identified by algorithm using administrative, laboratory, and pharmacy records. The data were used to calculate incidence of foot ulcers, risk of osteomyelitis, amputation, and death after diagnosis of foot ulcer, and attributable costs in foot ulcer patients compared with patients without foot ulcers. RESULTS: Among 8,905 patients identified with type 1 or type 2 diabetes, 514 developed a foot ulcer over 3 years of observation (cumulative incidence 5.8%). On or after the time of diagnosis, 77 (15%) patients developed osteomyelitis and 80 (15.6%) required amputation. Survival at 3 years was 72% for the foot ulcer patients versus 87% for a group of age- and sex-matched diabetic patients without foot ulcers (P < 0.001). The attributable cost for a 40- to 65-year-old male with a new foot ulcer was $27,987 for the 2 years after diagnosis. CONCLUSIONS: The incidence of foot ulcers in this cohort of patients with diabetes was nearly 2.0% per year. For those who developed ulcers, morbidity, mortality, and excess care costs were substantial compared with those for patients without foot ulcers. The results appear to support the value of foot-ulcer prevention programs for patients with diabetes.