Abstract: This study focuses on identifying the challenges and prospects of Ethiopian tourism industry.The primary data was collected from 501 foreign tourists in the study area. To do this, the researcher was used two types of probability sampling techniques such as stratified sampling and simple random sampling methods. The result of the study show that lack of promotion,lack of physical infrastructure (road, transportation system,network facility, availability of hotel accommodations especially tourist site), misperceptions the images of Ethiopia,shortage of human trained powerarechallenges of Ethiopian tourism industry. On the other side the Ethiopia is a capital city of Africa because the African union located in Ethiopia,Ethiopian airline the almost the leading airline from Africa and to be a member of a star alliance, Ethiopia now building the leading African man made dam, lastly Ethiopia is one the leading African country that registered heritage by UNISCO. All this are opportunities of the growth of Ethiopian tourism industry.