Khat (Catha edulis) is a rapidly expanding perennial crop in the Ethiopian highlands, and it is Ethiopia's second largest export item. The leaves of the crop are used for their stimulating effect. The present study was undertaken in Habro district in western Hararghie. Khat production in this district is rapidly replacing cereal production and to some extent coffee production. About 70% of farmers' income in the study area is currently obtained from khat. One important reason for the expansion of khat production is that the khat–maize intercropping system is 2.7 times more profitable per hectare than maize monocropping. Khat is also less risky to grow than cereals and coffee because it is less vulnerable to drought. Increased production leads to changes in livestock composition because oxen are far less needed for plowing in the khat-based system; moreover, availability of crop residues for fodder is reduced when khat expands. Khat growing farmers, therefore, give more emphasis to milk-producing animals such as cows and goats. It was found that khat producers also are consumers of khat and that khat consumption has become widespread in the nearby secondary school. Khat consumption negatively affects people's working capacity. Hence, unskilled khat consumers in urban areas are paid 7 birr (US$0.84) per day, whereas nonkhat users are paid 10 birr (US$1.22). Measures to control further khat expansion will need to address both supply and demand.