Practices that minimize the rate of soil degradation, improve soil fertility, increase crop yields and raise farm income are key to sustaining agricultural productivity in the hills of Nepal. Against this background, this study examined the impact of an agroforestry intervention project on soil fertility and farm income based on a sample of subsistence farm households in Dhading district. The project was implemented in 1993/1994 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 farmer’s perception toward agroforesty’s impact on soil fertility. Soil samples taken from both project and non-project areas were also analyzed to examine agroforestry’s impact on various soil nutrients. The 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. The 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.