The purpose of the study is to assess the economics of dairy farming in Pakistan and the prospects for improving the dairy income for small-scale producers, which currently form the backbone of the dairy industry. The document begins with a general overview of milk production in the country, followed by a detailed study of dairy farming in the province of Punjab, with a particular focus on the small-scale producers. Preliminary estimates of the margins in the formal and informal market for liquid milk are provided. The study applies a method of economic analysis developed by the International Farm Comparison Network (IFCN) which is based on the concept of 'typical farms'. Four farm types were selected to represent 'typical farms' in the province of Punjab: one farm with one and three, and two farms with ten dairy animals respectively, one of the latter located near the city of Lahore. Each farm is described in detail with assets, production costs, profits and other economic information presented both graphically and in the text. The study concludes that a sound intervention strategy to strengthen the position of the small scale dairy farms would focus simultaneously on at least three fronts: (1) lowering farm production costs, (2) increasing productivity and (3) promoting a "higher" farmers' share in the consumer milk prices. A more competitive milk marketing system designed to cater for the needs of small-scale dairy farmers would send strong positive signals for small farmers to mobilise their own resources and develop their operations.