The naturally regenerated native woody species diversity was studied in eucalypt plantations at Menagesha, where there was remnant natural forest, and at Chancho, where natural forests were absent. A total of 22 and 20 woody species belonging to 18 and 17 families were found, and of these species, trees accounted for 68 and 55% at Menagesha and Chancho, respectively. About 83% of the woody species found in the adjacent natural forest, including important timber species were represented in the eucalypt understory at Menagesha. However, the relative abundance of species in eucalypt plantations and the adjacent natural forest varied considerably. Woody species richness and abundance of sample plots at Menagesha were on average 2.4 times and 5.7 times higher, respectively, than the sample plots at Chancho. This result demonstrates the crucial role of the remnant small patches of natural forest, as a source of diaspores for the restoration of the woody species diversity in degraded areas of the Ethiopian highlands. There was no significant difference in woody species diversity between the eucalypt stand margin and centre. The understory woody species density in eucalypt plantations was up to 8325 stems/ha, indicating that the numerous eucalypt stands have a high potential for restoring the woody species diversity in the Ethiopian highlands. In order to fully re-establish the diverse and economically valuable natural forest, complementary measures such as enrichment planting of missing primary forest species may be required.