ABSTRACT Ethiopia is one of the country located in East Africa, which is dominated by agriculture. Majority of this sector were owned by smallholder farmers. The smaller the amount of available land, the more complicated it becomes for farmers to maintain their traditional diversified cropping regime. Therefore, to survive on agricultural land farmers give more attention to crops with a high cash return like khat cultivation. The study was aimed at evaluating the effect of khat (Catha edulis) cultivation on rural household income, crops and livestock farming. The study employed mixed random sampling methods. Four rural Kebeles were selected purposively and 180 household heads were selected randomly using probability proportional to sample size. Both qualitative and quantitative data were collected from primary and secondary sources using semi-structured interviews schedule and Focus Group Discussion. Descriptive statistics such as mean, percentage, frequencies, inferential statistics like t-test, and chi-square test, ANOVA and correlation as well as Econometrics model were employed to analyze the data. Results from descriptive statistics shows that majority of the households were male-headed 159(88.33%) and all sampled households were productive labor force (44.18year). The result also revealed that khat contributes 50.90% of the annual household income of the household on average or 7.59, 5.46 and 1.54 times higher than average incomes gained from off-farm and non-farm activity, livestock and their product sale as well as crop produced and sold by the household, respectively. The non-parametric correlation coefficient result shows that khat cultivation have negatively and significantly influence crop production land, livestock and grazing land, private forest land and fruit and vegetable farming land with a Kendall's tau_b correlation coefficient of r=−0.991, -0.795, -0.952 and -0.879, respectively at less than 1% significant level. In addition, it had also significantly affect livestock holding from 9.59 TLU to 5.61TLU on average within 11.13 years of khat cultivation. Empirical findings from Beta regression models shows that farming experience, education status, proportion of land allocation for khat cultivation, total working capital of the household, khat tree planted density per hectare and participation in off-farm and non-farm activity have significant and positive effect on the proportion of annual khat income of the household in khat cultivation. Whereas, livestock holding, total household asset ownership and access to mobile have significant and negative influence on proportion of annual khat income of the household in khat cultivation in the study area. Therefore, the study concluded that, cultivation of khat have a positive and significant effect on rural households' income and also have negative and significant influence on crop and livestock farming. But, the side effect of khat cultivation outweighs the benefit. Therefore, district government has to change the attitude of farmers towards crop production rather than khat cultivation through continuous awareness creation or training by development agent, health extension workers, teacher in school religious leaders and community elders. Key words: Khat cultivation, annual khat income, beta regression, Bahir Dar city, Bahir Dar zuria, Ethiopia.