Tobacco farming is well established as the traditional cash crop in Tabora region. However, in recent years, groundnut is one among the cash crops which have been introduced in the area as an alternative source of income for smallholder farmers. Using 2007/2008 cropping season survey and the data from 121 randomly selected smallholder farmers from three villages, this study provides a comparative economic analysis for tobacco and groundnut farming systems. The analysis of quantitative and qualitative data from the survey was done by using Cobb-Douglas production function, gross margin analysis, independent sample t-test, and descriptive statistics such as frequency and multiple responses. The results of the study indicate that gross margin per acre for groundnut was lower than that of tobacco by 569 231.90 Tshs. Gross margins and household’s income contribution by the two crops were tested using independent t-test, and revealed a significant difference with the P-value of < 0.007 and P-value <0.000 respectively. Cob-Douglas production function for tobacco and groundnut which was analysed using OLS regression method to estimate the responsiveness of output to inputs revealed that the constant value of groundnut (4.577) is bigger than that of tobacco (4.355), implying that groundnut farmers are more technically efficient than their tobacco counterparts.. As for groundnut, 1% increase in hired labour was associated with 0.392% increase in output while a similar increase in hired labour in tobacco was associated with a decrease of 0.21% in output. This suggests that farmers could be advised to allocate more hired labour in groundnut production than in tobacco production. Unlike in tobacco production, a 1% increase in seed was associated with a decrease of 0.138% in groundnut output. Given the extensive production and marketing constraints, the following policy recommendations are put forward; implementing a sustainable and strong input distribution system and the need of putting in place marketing programs that would support groundnut crop intensification activities.