Based on the existing situation with regard to management of diversity, some federations may adopt multi-level system of authority and governance; and others may incline towards centralized governance. However, it is believed that Federation's capacity to manage ethnic diversity varies across its functions and distinct features. Accordingly Ethiopia having planned to accommodate diversity and to address the question of nationalities in the country opted to adopt federalism as the best way. It is believed that federalism is a system of government which allows decentralization of decision making power to down tires of government with the intention to enhance the participation of local communities there by to address the need of diversified groups.To achieve its objectives the establishment of institutional structure of the federation has been realized. However, the way these institutions have channeled to the activities of the electorate, political parties, organized interest groups, bureaucracies, and informal elites and the operational realities on the ground with regard to the way the federal system is managed has contributed to the accentuation of ethnic conflict rather than managing the diversity. After the adoption of ethnic federalism in 1991, there were many massive massacres and persecutions. The contemporary crises in different parts of Ethiopia seem to be attributable to the above dilemmas. Therefore, the general trend in the implementation of the ethnic federalism after its establishment shows that, “Ethiopia remains hindered in ethnic strife” and contrary to the very problem it was intended to resolve, and it seems to have contributed more problems than it set to solve (Gudina, 2007; Haile, 1996; Maru, 2010). Based on these facts, one can conclude that the implementation of ethnic federalism in Ethiopia is remained problematic and ineffective and it seems “a fragile and perilous experiment” that puts a big challenge on management of diversity in the country. Keywords: Ethnic-Federalism, Managing diversity, Ethiopia, Regional States