Abstract: Several analyses on poverty made since 1977 confirm that an income-based poverty is widespread in Uganda. Poverty in the country exists in a wide variation depending on the rural-urban areas, physiographic regions, gender and tribal ethnic groups. The purpose of this study is to examine poverty based on different household socio-economic variables. It also tries to highlight the source of inequality using decomposition of economic inequality indices in poverty ridden rural areas. The household survey conducted in Nabweya and Bufumbo parishes, Mbale district from April to December, 2007. Out of the total 116 sampled households with more or less similar proportion from each stratum, 60 from Nabweya and 56 from Bufumbo were selected randomly using semi-structured questionnaire. The household level data were collected on various socio-economic aspects and focusing on different sources of income. The results show that based on tribe, the Iteso are deprived in terms of education and landholding and therefore, laboring and agriculture remain the prominent source of income for them. Average income from salaried job is the highest followed by remittance and that from laboring is the lowest. This led to the high concentration of Iteso under third and fourth income quartile (poorer). A share of income from agriculture in total income is the highest and the share from laboring is the lowest. Relative concentration coefficient shows salaried job has both the highest income disequalizing effect (C_j = 1.56 or g_i = 1.49) as well as the highest factor inequality weight followed by agriculture. In case of Bufumbo, however, salaried job followed by remittance has the highest income disequalizing effect. Negative values of Relative Concentration Coefficient and factor inequality weight for laboring indicate that income from it has the income equalizing effect. Thus, agricultural promotion in rural areas based on labor demand increasing policies with proper market arrangement for the agricultural produce will be helpful to reduce the income inequality. In addition, regulation regarding working hour and minimal wage rate should be strictly enforced for the welfare of those involved in laboring, which is also the poorest.