OBJECTIVE: The current study assessed changes in children and mothers' nutritional status before and after raising Bangladeshi households out of extreme poverty through an income-generating activities (IGA) programme. DESIGN: Extreme poor households took part in the IGA programme for 2 years and recruitment took place over four waves in annual cycles. Children and mothers were measured with regarding their nutritional status before and after the IGA programme commenced. SETTINGS: Rural Bangladesh. SUBJECTS: Three-hundred and eighty-two children under 5 years of age at recruitment, and their mothers. RESULTS: After 2 years of the IGA programme, the prevalence of stunting significantly declined from 40·3 % to 33·0 % (P = 0·003), anaemia declined from 51·6 % to 44·0 % (P = 0·020) while mothers' CED (Chronic Energy Deficiency) declined from 52·0 % to 42·7 % (P < 0·001), but no significant changes were found in children's wasting, declining from 25·4 % to 21·5 %, underweight which remained the same at 43·2 %, while mothers' anaemia rose from 39·3 % to 42·7 %. There were also highly significant improvements in household socio-economic status. Increases in socio-economic security (especially in relation to cash savings and net income) and improvements in food quantity and quality (indicated by greater food diversity and animal food intake) were associated with normal nutritional status, and cessation of open defecation was associated with reduction in mothers' and child anaemia. CONCLUSION: The IGA programme was associated with increased household socio-economic security, such as asset accumulation, food security and sanitation, and with improvements in the nutritional status of children and their mothers in extreme poor households.