Hills are important to the economy of Nepal, but have been 3.t a disadvantage with regard to infrastructure, supply of fertilizer, credit, and seed. This has already increased the disparity between the hills and the plains. Smaller size of highly fragmented holdings, lower productivity, lower level of education and extension, cultivation of marginal lands, soil erosion, lack of alternative sources of employment in villages and consequent migration, and limited quantities of marketable surplus are all responsible for the vicious circle of lower levels of farm incomes, limiting the capability of the small hill farmer to reinvest or buy new inputs. Agriculture alone can not sustain the rural economy in hills where development has to be a continuous and long term process, and the basic approach to which has to be an integrated one. This integration must be sectoral, spatial, and temporal. Rural change iri hills has to encompass agriculture, horticulture, livestock, forestry, agro-based industries, necessary infrastructure, social services, and even tourism. These efforts must be supplemented with special programmes designed to help small farmers, rural poor, and women so that the benefits of development are shared by the whole rural populace. The paper points out some areas where agricultural economists can make a very useful contribution.