As part of efforts to develop an informed policy for rotavirus vaccination, this prospective study was conducted to estimate the burden of rotavirus diarrhea among children less than 5 years old attended to the Department of Pediatrics, Jigme Dorji Wangchuk National Referral Hospital (JDWNRH), Thimphu, Bhutan. The duration of the study was three years, extending from February 2010 through December 2012. We estimated the frequency of hospitalization in the pediatric ward and dehydration treatment unit (DTU) for diarrhea and the number of events attributable to rotavirus infection among children under 5 years of age. During the study period, a total of 284 children (1 in 45) were hospitalized in the pediatric ward, and 2,220 (1 in 6) in the DTU with diarrhea among children residing in the Thimphu district. Group A rotavirus was detected in 32.5% and 18.8% of the stool samples from children hospitalized in the pediatric ward, respectively. Overall, 22.3% of the stool samples were rotavirus-positive, and the majority (90.8%) of them was detected in children under 2 years of age. From this study, we estimated that the annual incidence of hospitalization in the pediatric ward and DTU due to rotavirus diarrhea was 2.4/1000 (95% CI 1.7–3.4) and 10.8/1000 (95% CI 9.1–12.7) children, respectively. This study revealed that rotavirus is a major cause of diarrhea in Bhutanese children in Thimphu district and since no study has been performed previously, represents an important finding for policy discussions regarding the adoption of a rotavirus vaccine in Bhutan.