The judge also plans to lift an injunction barring Chuck Cox from being at the older boy's school, which he will continue to attend.
Jennifer Graves, Josh Powell's sister, said she visited the boys Tuesday evening at the Cox home and they were doing well.
"We read stories and played games and the boys really warmed up to us quickly," she said. "They were really happy to see us."
During one court recess, Chuck Cox told The Tribune the boys "are with us and they're doing fine."
Graves said Josh Powell's assertions that the boys don't know their grandparents or other relatives is "ridiculous."
They were "over at our house almost weekly," she said. "The idea they don't know us is silly."
Asked if the boys had inquired about their dad, Graves said, "They mentioned something, but we just tried to not go into that kind of thing."
Josh Powell had asked the judge to leave the boys in the foster home where they were first taken because of the animosity between himself and the Coxes.
"I want my sons to be taken care of with as much oversight as possible, particularly in a case that has been so emotional and [with] so many things said," Josh Powell told the judge.
The state objected and the judge refused, although she expressed concern about how the ongoing family conflict might affect the boys. She ordered that neither family discuss the various legal cases with the boys.
The judge agreed that Josh Powell will have three-hour, supervised visits with his sons on Sundays. That day was picked after he objected to his sons attending church services with the Coxes, who are members of The Church of Jesus Christ of Latter-day Saints.
Josh Powell also agreed to undergo psychological evaluations, which will include a parenting assessment, as part of determining whether he is a fit parent. And the state agreed to let him have some say on a counselor who will work with his sons.
Josh Powell seemed stunned by Nelson's decision, telling the judge that he was "expecting to bring my sons home. I had no reason to expect they would not be placed back with me."
But Steve Downing, the Coxes' attorney, said: "I think it was the right outcome all the way around."
Assistant Attorney General John Long, representing CPS, gave Nelson three reasons to keep the children separated from their father. Chief among them: police are still investigating what, if anything, Josh Powell knows about his wife's disappearance.
"If he's responsible for that disappearance, those children have been through hell frankly," Long said.
Police also are investigating what Josh Powell may or may not have known about his father's alleged criminal activities while he was living with him in Puyallup.
Steve Powell was arrested on Sept. 22 on charges of voyeurism and possessing child pornography, and police have said they are still combing through the thousands of images of women and girls he filmed without their knowledge.
The images, taken from 15 computers confiscated from the home in August, were available to everyone living in the home, Long argued.
Long also said Josh Powell admitted to CPS workers that he has taken photos of people's legs without their knowledge and that some of his father's information may be on his computer.
Long told Nelson that law enforcement was concerned about the "general environment" in the home, which the children shared with an uncle who has mental health issues and who answered a door naked when officers came to the house once. Long said police found what he described as a "hangman's noose" and a poster of a woman being stabbed at the home.
Josh Powell countered in court that he told CPS workers that he took pictures of "lakes" and landscape scenes, but never people's body parts. Most of the computers found in the home were outdated and not working, he said.
Josh Powell said the "noose" was actually the handle to a piece of exercise equipment and that he'd never seen the poster Long mentioned. He said his brother was naked because he was in a bathroom.
"With regard to the things said about my brother, he has agreed that if that were a factor in my sons coming home to me that either he or I would find another place to live in order to protect my sons," Josh Powell said.
Josh Powell told the judge that police have had his other computers for two years and that he has never had any illegal pornography on his computers something he believes law enforcement already knows.
Josh Powell also reiterated what he told the judge Tuesday: that he had no knowledge of his father's activities, that he wants his wife back, and that he had nothing to do with her December 2009 disappearance from their West Valley City home.
"I love my wife, I know my wife loves my children," he said. "I want my wife back as much as anyone else wants her back."
Josh Powell on Tuesday told the judge he is willing to move out of his father's home if Steve Powell posts bail, set at $200,000.
But CPS has never been to the home to evaluate it, he said, and no state officials advised him to be prepared with names of his own relatives who might be suitable guardians for his children. In court, he suggested his sister, who lives in the home.
"The speed at which all this has been coming has not allowed a lot of time for me to go and ask other relatives," Josh Powell said.
At a press conference hours after the court hearing, Graves said the ending "was a good one."
Graves shares the Coxes' belief that her brother is responsible for his wife's disappearance and that his home was "an inappropriate place for them to be in the first place."
She said she became aware of her father's interest in pornography as a child. "He definitely exposed me to inappropriate things as a child," she said, including watching an adult movie while she was present and having sex talks that were explicit, not educational.
"She's been estranged from her dad because she understood what he was," added Kirk Graves, Jennifer's husband.
But that didn't extend to her brother and sister who also shared the Puyallup home with Josh and Steve Powell.
And the Graveses said they were distressed about death threats, confirmed by "credible sources," that have been leveled against those siblings.
"We don't think that's appropriate," he said. "If anyone has the right to feel mad, it is Chuck and Judy, Jennifer and I, and none of us feel that way."
firstname.lastname@example.org Recent coverage of the Susan Powell case:
Powell children placed with maternal grandparents
Police still checking images seized in Steve Powell search
Friend: Steve Powell was obsessed with Susan, porn, for years
http://tinyurl.com/6hqdnb7 WVC police to invite Powell, FBI to talk
A West Valley City police spokesman Wednesday confirmed that the department is preparing a letter to Josh Powell inviting him to speak with the FBI.
Josh Powell last month said he was willing to meet with the FBI, but not West Valley City police.
West Valley City police Sgt. Mike Powell, who is no relation to Josh or Susan Powell, said the department will accept Josh Powell's offer and pay the associated expenses.
Also, Mike Powell confirmed detectives may need three months to comb through a trailer full of evidence seized during the search of Steve Powell's Puyallup, Wash., home. He said police estimate the investigation has so far cost the city more than $500,000.