Background: Young children exposed to Mycobacterium tuberculosis have a high risk of disease progression following infection. This study aimed to determine risk factors for M. tuberculosis infection and disease in children following exposure to adults with multidrug-resistant (MDR) tuberculosis (TB). Methods: Cross-sectional study; all children aged < 5 years, routinely referred per local guidelines to the provincial specialist MDR-TB clinic, Western Cape Province, South Africa, following identification as contacts of adult MDR-TB source cases, were eligible for enrolment from May 2010 through April 2011. Demographic, clinical and social characteristics were collected. All children underwent HIV and tuberculin skin testing. Results: Of 228 children enrolled (median age: 30 months), 102 (44.7%) were classified as infected. Of these, 15 (14.7%) had TB disease at enrolment. Of 217 children tested for HIV, 8 (3.7%) were positive. In adjusted analysis, child's age (AOR: 1.43; 95% CI: 1.13-1.91; p = 0.002) and previous TB treatment history (AOR: 2.51; 95% CI: 1.22-5.17; p = 0.01) were independent risk factors for infection. Increasing age of the MDR-TB source case (AOR: 0.67; 95% CI: 0.45-1.00; p = 0.05) was protective and source case alcohol use (AOR: 2.59; 95% CI: 1.29-5.22; p = 0.007) was associated with increased odds of infection in adjusted analysis. Decreasing age of the child (p = 0.01) and positive HIV status (AOR: 25.3; 95% CI: 1.63-393; p = 0.01) were associated with prevalent TB disease. Conclusion: A high proportion of children exposed to MDR-TB are infected or diseased. Early contact tracing might provide opportunities to prevent the progression to TB disease in children identified as having been exposed to MDR-TB.