This retrospective cohort study includes all new leprosy patients registered for multidrug therapy (MDT) in 1990 at the Danish-Bangladesh Leprosy Mission project in Bangladesh. The main objective was to determine the extent of nerve-function impairment (NFI) at diagnosis and at completion of MDT, and to identify opportunities for intervention and their relative impact on the prevention of disabilities (POD). A total of 786 patients were included; 486 males and 300 females. There were 315 PB, and 471 MB patients. In terms of the WHO leprosy disability grading system, at the time of diagnosis 31/315 (9.8%) had grade 1 or grade 2 disability in the PB group, and 177/471 (37.6%) in the MB group. The incidence rate of NFI during MDT was 3.5 per 100 person years at risk (PYR) in the PB group, and 7.5 per 100 PYR in the MB group. In the MB group 37 (7.9%) previously normal patients sustained NFI during MDT, whilst 19 (4.0%) with NFI at diagnosis showed complete recovery at completion of MDT. The most commonly involved nerves were the ulnar (motor function) and the posterior tibial nerves (sensibility). Reversal reactions were observed in 0.6% of the PB patients during MDT, giving an incidence rate of 1 per 100 PYR. The percentage of MB patients diagnosed with reversal during MDT was 14.2%, giving an incidence rate of 6 per 100 PYR. The percentage of MB patients diagnosed with ENL during MDT was 2.1%, with an incidence rate of 1 per 100 PYR. It was concluded that early detection of new cases of leprosy would prevent disabilities in more than 30% of all patients, thus having the highest impact in the quest for the prevention of disabilities. POD activities during and after MDT will prevent disabilities in approximately 10% of all cases. This study also indicates that treatment with prednisolone is effective and should be available at field level for all patients with recent NFI.