Practices that minimize the rate of soil degradation, increase crop yields and raise farm income are key to sustaining agricultural productivity in the hills of Nepal. The use of farmland is undergoing rapid changes in response to increasing population pressure, deforestation and subsistence needs. Against this background, this study examined the impact of an agroforestry intervention project on farm income based on a sample of subsistence farm households in Dhadhing district. The project was implemented by Nepal Agroforestry Foundation in 1993- 94 to increase fodder production through the promotion of agroforestry. A total of 223 households (82 'with' project and 141 'without' project) were interviewed during May-October 1998 to collect information on production and agroforestrys' impact on farm income. The benefit-cost analysis showed that the agricultural system including agroforestry was more profitable than the conventional one. The results also showed that the introduction of mulberry trees ( Morus alba ) for sericulture could further enhance the profitability of an agroforestry-based system. Thus, agroforestry has great potential for enhancing food production and farmers' economic conditions in a sustainable manner through its positive contributions to household income.