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Mushroom is emerging as an important commercial crop in Nepal. The demand for mushroom is on rise and its production is also increasing year after year. This research study analyzes the profitability of mushroom production and its marketing constraints, and recommends improvement measures both at operational and policy levels. It focuses on White button and Oyster mushrooms. The findings are based on a case study from Balambu Village Development Committee of Kathmandu district in Nepal.Both quantitative and qualitative analysis was done. The study indicates that mushroom cultivation is a profitable enterprise with the benefit-cost ratio of greater than one and its cost of production reduces significantly with the increase in the scale of farming. Major production and marketing constraints are: poor quality of inputs, unavailability and variations in the price of inputs, inadequate training on production and marketing methods, lack of financial support, disease/pest problems, lack of market information, and lack of storage facilities and Nepal Bandha(Strike). The study also shows several gaps and inconsistencies in existing goverment policies for promoting organized market.