The introduction of pulse oximetry in clinical practice has allowed for simple, noninvasive, and reasonably accurate estimation of arterial oxygen saturation. Pulse oximetry is routinely used in the emergency department, the pediatric ward, and in pediatric intensive and perioperative care. However, clinically relevant principles and inherent limitations of the method are not always well understood by health care professionals caring for children. The calculation of the percentage of arterial oxyhemoglobin is based on the distinct characteristics of light absorption in the red and infrared spectra by oxygenated versus deoxygenated hemoglobin and takes advantage of the variation in light absorption caused by the pulsatility of arterial blood. Computation of oxygen saturation is achieved with the use of calibration algorithms. Safe use of pulse oximetry requires knowledge of its limitations, which include motion artifacts, poor perfusion at the site of measurement, irregular rhythms, ambient light or electromagnetic interference, skin pigmentation, nail polish, calibration assumptions, probe positioning, time lag in detecting hypoxic events, venous pulsation, intravenous dyes, and presence of abnormal hemoglobin molecules. In this review we describe the physiologic principles and limitations of pulse oximetry, discuss normal values, and highlight its importance in common pediatric diseases, in which the principle mechanism of hypoxemia is ventilation/perfusion mismatch (eg, asthma exacerbation, acute bronchiolitis, pneumonia) versus hypoventilation (eg, laryngotracheitis, vocal cord dysfunction, foreign-body aspiration in the larynx or trachea). Additional technologic advancements in pulse oximetry and its incorporation into evidence-based clinical algorithms will improve the efficiency of the method in daily pediatric practice.