Practices that minimize the rate of soil degradation, improve soil fertility, increase crop yield and raise farm income are the keys to sustaining agricultural productivity in the hills of Nepal. The impact of an agroforestry intervention project on soil fertility and farm income was examined based on a sample of subsistence farm households in Dhading district. The project was implemented in 1993-94 to increase fodder production through the promotion of agroforestry. A total of 223 households (82 project and 141 non-project) were interviewed during May 1998-October 1998 to collect information on production and farmers' perceptions toward agroforestry's impact on soil fertility. Soil samples (Cambisols) taken from both project and non-project areas were also analysed to examine agroforestry's impact on various soil nutrients. Soil analysis revealed that differences in amount of organic matter, nitrogen, phosphorus and potassium observed between the soils under agroforestry system and the conventional system were not significant at the 0.05 level. The benefit-cost analysis showed that the agricultural system with agroforestry was more profitable than the conventional system. Results also showed that the introduction of multipurpose trees, such as mulberry ( Morus alba ), for sericulture could further enhance the profitability of agroforestry-based system. Thus in the hills, agroforestry has potential for enhancing food production and farmers' economic conditions in a sustainable manner through its positive contributions to soil fertility and household income.