This study evaluated the impact of an AI heifer calf rearing scheme on dairy stock development, in a coconut grazing and a peri-urban smallholder dairy production system in the Western Province of Sri Lanka. The heifer rearing scheme included free advice on calf rearing, drugs, acaricides, minerals and subsidised concentrates for 30 months. The farmers in the coconut growing area integrate dairying with their plantation, they sell their milk to the main processors. The peri-urban farmers are intensive milk producers, who sell their milk at informal markets. To estimate the effect of the heifer rearing scheme on dairy replacement stock development, scheme farmers were compared with farmers who did not participate in the scheme. Calf mortality was twice as high in non-scheme farms (23-28%) as in scheme farms (12-14%). The scheme had a positive effect on weight development and scheme heifers calved 4.5 months earlier than non-scheme heifers. The calf rearing package is cost effective in both farming systems, however, the required cash inputs are a major constraint. The costs per in-calf heifer under the scheme are much lower than the production of such animals by either multiplication in state farms or importing them. The coconut grazing system showed the highest potential for producing surplus dairy stock.