We report on the synthesis and optical and structural characterization of ultrasmall (<2 nm) CdS nanoparticles with a narrow size distribution of 10% prepared in aqueous and alcohol solutions of polyethyleneimine (PEI). The PEI-stabilized CdS nanoparticles reveal a structured absorption band with the first excitonic maximum at 3.5 eV and broad-band photoluminescence with quantum yields of 12−14% in water, 18−20% in ethanol (80 vol %), and up to 60−70% in solid PEI films at room temperature. The nature of the photoluminescence was studied by using the time- and wavelength-dependent emission measurements. The role of precursor cadmium(II)−PEI complex in the formation of uniform and ultrasmall luminescent CdS nanoparticles, as well as the dynamic emission quenching by water, are discussed. A study of the photochemical properties of PEI-stabilized CdS nanoparticles both under continuous and nanosecond pulse illumination showed excellent stability of solid PEI films incorporating CdS nanoparticles toward UV illumination and reductive character of the CdS nanoparticle photocorrosion in aqueous solutions.