Children with severe acute malnutrition (SAM) are at high risk of impaired development. Contributing causes include the inadequate intake of specific nutrients such as polyunsaturated fatty acids (PUFAs) and a lack of adequate stimulation. We conducted a pilot study assessing developmental and nutritional changes in children with SAM provided with a modified ready-to-use therapeutic food and context-specific psychosocial intervention in Mwanza, Tanzania. We recruited 82 children with SAM (6–36 months) and 88 sex- and age-matched non-malnourished children. We measured child development, using the Malawi Development Assessment Tool (MDAT), measures of family and maternal care for children, and whole-blood PUFA levels. At baseline, the mean total MDAT z-score of children with SAM was lower than non-malnourished children; −2.37 (95% confidence interval: −2.92; −1.82), as were their total n-3 fatty acids, eicosapentaenoic acid (EPA) and docosahexaenoic acid (DHA) levels. After 8 weeks of intervention, MDAT z-scores improved in all domains, especially fine motor, among children with SAM. Total n-3 and EPA levels increased, total n-6 fatty acids decreased, and DHA remained unchanged. Family and maternal care also improved. The suggested benefits of the combined interventions on the developmental and nutritional status of children with SAM will be tested in a future trial.