Spatial analyses of the effect of insecticide (permethrin)-treated bed nets (ITNs) on nearby households both with and without ITNs was performed in the context of a large-scale, group-randomized, controlled mortality trial in Asembo, western Kenya. Results illustrate a protective effect of ITNs on compounds lacking ITNs located within 300 meters of compounds with ITNs for child mortality, moderate anemia, high-density parasitemia, and hemoglobin levels. This community effect on nearby compounds without nets is approximately as strong as the effect observed within villages with ITNs. This implies that in areas with intense malaria transmission with high ITN coverage, the primary effect of insecticide-treated nets is via area-wide effects on the mosquito population and not, as commonly supposed, by simple imposition of a physical barrier protecting individuals from biting. The strength of the community effect depended upon the proportion of nearby compounds with treated nets. To maximize their public health impact, high coverage with treated nets is essential.