The present study analyzes a project (The Integrated Livestock Development Project) which introduced crossbreeding as innovation among smallholder dairy cattle farmers in the North Gondar Zone in Ethiopia with the objective to improve living standards of households through increased livestock productivity. The aim of the study was to identify trends in adoption and development of crossbreeding and complementary innovations, current practices, effects on production system and livelihood of beneficiary farmers as well as challenges connected with crossbreeding. Results give insight into farmers innovation processes which took place during the projects implementation as well as 5 years after the project stopped. The results obtained reveal a significant performance superiority of crossbred cows to indigenous cows in terms of daily milk yield, age at first calving and calving interval. For smallholder farmers participating in this study crossbreeding enables a transition from subsistence to small-scale commercial farming, increases household income, improves food security and livelihoods. However in order to experience benefits from this innovation a reliable access to farming inputs, animal health and mating services and improved management practices, which continuously need to be monitored and strengthened, is required. Therefore a long-term commitment from organizations is necessary. Crossbreeding can be successful in areas with good road infrastructure and accessibility, strong market linkage and where feed demand can be satisfied. Negative effects of crossbreeding are the increase of workload and cattle herd size. Challenges, like high cost and low availability of inputs and low demand for dairy products during religious fasting periods, might expose to production risk. The wide variety of crossbred genotypes found in the study indicates lack of an appropriate breeding strategy set up by ILDP or ineffectiveness of extension service in the field.