A diagnostic survey was conducted in the highlands of Bale, Southeast Ethiopia with the objectives to assess the status and challenges of smallholder dairy cattle production. The study area was stratified into two based on the rainfall patters, human and livestock population. For the study the total of 120 households were randomly selected and interviewed using a semi-structured questionnaire. Dairy cattle management system was predominantly traditional. Livestock breeds were almost indigenous local zebu type. About 31.7% of the interviewed households had only a single lactating cow whereas 20% of them did not have lactating cows. Mating was free and commonly seasonal in the area. Almost all classes of dairy cattle were herded together with other livestock species on communal grazing lands. Stall-feeding was, however, practiced in certain cases. Native pasture, crop residues and grazing of aftermath and fallow land are the dominant feed resources available for dairy cattle. Reproductive and productive performances are poor, and mean age at first calving, parturition interval and average calf born per lifetime of local breeds are discussed in the text. Traditional management system coupled with poor nutrition resulted in low milk production in the study area.Therefore, improvement should be made in the area of feed resources and feeding strategies, husbandry practices, health aspects, artificial insemination services and reproductive performance as well as marketing and market infrastructure to increase milk production and household income in the area.