In 1991 Ethiopia established an ethnic federal system that gave full recognition to ethnic autonomy, while maintaining the unity of the state. Its new constitution created a federal system largely consisting of ethnic-based territorial units. The constitution aspires to achieve ethnic autonomy and equality while maintaining the state. The federal system is significant in that its constitution provides for secession of any ethnic unit. It encourages political parties to organize along ethnic lines, and champions an ethnicized federal state with a secession option. As an exception to the general pattern in Africa, it is a worthy case study. The paper has four interrelated objectives. First, it situates the Ethiopian case in comparative perspective. Second, it provides an overview of ethnic diversity in Ethiopia. Third, it analyzes the evolution and structure of ethnic federalism in Ethiopia. Fourth, it attempts to provide a preliminary appraisal if its success and failure thus far and to speculate on its future prospects.