Most of the agroforestry systems (AFS) in Nepal are traditional, and deliberate management of trees, crops and livestock as an integrated and interactive agroecosystem, albeit its enormous socio-economic and ecological benefits, is limited. The objective of this review paper is to understand the prospects, analyze challenges and suggest practical solution for promoting agroforestry as a viable system balancing economic, social and environmental concerns. We develop this paper based on practical experience on the ground and an in-depth review of relevant literature and highlights the prospects, challenges and ways forward of AFS, both farm-based and forest-based, in Nepal. Nepal has enormous agroecological diversity, suitable land availability for agroforestry, traditional knowledge, skill and labor forces, and huge prospects of adapting new technologies and developing market systems, especially considering emerging markets for developing remunerative and environment friendly value chains. However, the prospective value chains of the mountain agroforestry products face many challenges, including i) socio-economic constraints of the farmers mainly because of high initial adoption costs, limited information on benefit-cost of agroforestry practices, limited knowledge on full benefits of agroforestry, and limited markets and marketing information; ii) institutional constraints because of unclear policy to support agroforestry, the lack of extension services and undefined administrative boundaries; and iii) inadequate scientific knowledge, expertise and technologies to address management complexity of agroforestry system. We therefore suggest having a scan of those challenges and find out solutions, especially for promoting growth and competitiveness of the sector with poverty reduction strategy ensuring availability of food, fuel, fodder and employment opportunity for local communities. The paper provides a few successful cases of AFS and finally suggests ways forward to promote AFS and a business model which could help achieve the untapped potentials for enhancing income and employment opportunity, achieving food and nutrition security, and building sustainable land use systems.