We aimed to assess the performance of active surveillance for hospitalized childhood encephalitis in New South Wales (NSW) using the Paediatric Active Enhanced Disease Surveillance (PAEDS) network to inform methodology for the nationwide Australian childhood encephalitis (ACE) study. We piloted active surveillance for suspected encephalitis from May to December 2013 at the Children's Hospital at Westmead, Sydney, NSW. Cases were ascertained using four screening methods: weekday nurse screening of admission records (PAEDS), cerebrospinal fluid (CSF) microscopy records, magnetic resonance imaging (MRI) reports, and pharmacy dispensing records. Comprehensive clinical data were prospectively collected on consented participants and subsequently reviewed by an expert panel. Cases were categorized as confirmed encephalitis or ‘not encephalitis’; encephalitis cases were sub-categorized as infectious, immune-mediated or unknown. We performed an ICD-10 diagnostic code audit of hospitalizations for the pilot period. We compared case ascertainment in the four screening methods and with the ICD code audit. Forty-eight cases of suspected encephalitis were identified by one or more methods. PAEDS was the most efficient mechanism (yield 34%), followed by MRI, CSF, and pharmacy audits (yield 14%, 12%, and 7% respectively). Twenty-five cases met the criteria for confirmed encephalitis. PAEDS was the most sensitive of the mechanisms for confirmed encephalitis (92%) with a positive predictive value (PPV) of 72%. The ICD audit was moderately sensitive (64%) but poorly specific (Sp 9%, PPV 14%). Of the 25 confirmed encephalitis cases, 19 (76%) were sub-categorized as infectious, three (12%) were immune-mediated, and three (12%) were ‘unknown’. We identified encephalitis cases associated with two infectious disease outbreaks (enterovirus 71, parechovirus 3). PAEDS is an efficient, sensitive and accurate surveillance mechanism for detecting cases of childhood encephalitis including those associated with emerging infectious diseases. Active surveillance significantly increases the ascertainment of encephalitis cases compared with passive approaches.