Lung cell-free homogenate, which contains about twice the units of phosphatidate phosphohydrolase per mg of protein compared to liver, was fractionated by differential centrifugation and the fractions were assayed for phosphatidate phosphohydrolase and marker enzymes of endoplasmic reticulum, mitochondria, and lysosomes. Over 60% of the lung phosphatidate phosphohydrolase was associated with the endoplasmic reticulum, compared to 50% of the total liver enzyme. Thus a major portion of the more active lung enzyme is potentially involved in lipid biosynthesis by the endoplasmic reticulum. Less than 0.2% of the total lung enzyme was found in a lamellar body fraction, consistent with previous findings. The lung microsomal phosphohydrolase was specific for lipid substrates, showing equal activity towards phosphatidic acid or lysophosphatidic acid and relatively low activities towards glycerophosphates. It had a neutral pH optimum, similar to the liver enzyme, but differed somewhat in its relative activity at extremes of pH. Stability at 65 degrees C was greater for the lung enzyme. Fluroide inhibited lung (or liver) microsomal phosphatidate phosphohydrolase, while tartrate, MgCl2, or EDTA had no effect. The presence of a high activity of phosphatidate phosphohydrolase in lung endoplasmic reticulum is consistent with the rapid synthesis of pulmonary surfactant phosphatidylcholine.