By explicitly incorporating forest environmental products (FEPs) in household income accounting, this paper examines the role and significance of FEPs in household income and in rural poverty and inequality. As most conventional household surveys do not incorporate income from environmental sources, substantial gaps exist in our understanding of the actual functioning of rural economies and the extent of rural poverty and inequality. Using data from 360 randomly sampled rural households from 12 villages in Tigray (northern Ethiopia). we measure forest environmental resource use with a monetary yardstick and compares the value of FEPs with other household economic activities. We found that products from environmental sources represent an important component in rural livelihoods. Our analyses indicate that in the study area income from forest environmental sources occupies the second largest share in average total household income next to crop income. Poverty and inequality analyses show that incorporating forest environmental incomes in household accounts significantly reduces measured rural poverty and income inequality. Therefore, we suggest that sustainable forest management schemes should be adopted to maintain and enhance the flow of economic benefits to the surrounding communities without damaging the natural resource system. (c) 2008 Elsevier B.V. All rights reserved.