A longitudinal, prospective and controlled trial was undertaken to identify the most cost-effective treatment for children with severe malnutrition. Children <60% weight-for-height or with oedema aged 12-60 months, were sequentially allocated to i) in-patient treatment ii) day-care treatment iii) domiciliary management after one week of day-care. Institutional and parental costs incurred to reach 80% weight-for-height are compared. The groups were comparable as regards age, sex, nutritional status, presence of infection and socioeconomic status at recruitment. A total of 437 children completed the study. Mortality during treatment was low in all groups <5%). Although the domiciliary group took the longest to achieve 80% weight-for-height they did so at the lowest overall cost. Day-care treatment approached in-patient care as regards speed of recovery at less than half the total cost, but it was an unpopular option and only 4% gave this as their preference. Although parental costs were highest for the domiciliary group as no food supplements were provided, this was the majority's preference (67%) especially among the group who experienced it. Children continued to be followed for one year after they reached 80% weight-for-height to determine longer-term progress. Data were collected fortnightly for morbidity and monthly for anthropometry, mortality and relapse rates. All three groups increased in weight-for-height during the year from 80% to 91 % on average but no increase was observed in height-for age. There was a high prevalence of infection with an average incidence of 7 diarrhoeal episodes, and 30% presented with acute respiratory infection on more than 3 occasions. Without access to medical care it is likely that many would have relapsed. Only 0.6% however required readmission for severe malnutrition and 1.6% died. It is concluded that domiciliary management after 1 week of medical care is a cost effective option for treating severe malnutrition.