The role of livestock in agriculture in Sri Lanka is complex and significantly different from that of industrialized nations. Although the livestock sub-sector has contributed only around I.2o/o to the national Gross Domestic Product (GDP), it has been a crucial source of high quality protein, minerals and vitamins to the population, by way of milk, meat and eggs. For many rural smallholder farmers, livestock are a 'living bank'that serves as a financial reserve for periods of economic distress. In a global context the current status of the dairy industry in Sri Lanka is far below expectations, local production of milk having been able to meet only 30%o of the demand. Whilst there have been many political, technical and socio-economic factors conffibuting to tn-e virtual stagnation of the dairy industry in the country, the very low farm gate price being one of the major contributors to this, it appears that the sector cannot continue to survive as a subsistence based activity, because it is only a secondary source of income to the farming community. It is apparent that if dairy farming is to be a profitable venture, there is a need for the small holder farmers to consider dairying as a commercial enterprise and at the same time link with the large scale dairy farms. This would require major policy changes, with a strong commitment and sustained implementation strategy by the government in partnership with the private sector.