1. The membrane-bound phosphatidate-dependent phosphatidic acid phosphatase activity of rat lung has been investigated in cytosol and microsomal fractions using as a substrate [32P]phosphatidate bound to heat inactivated rat liver microsomes. Both activities demonstrated broad pH optima with a maximum of 7.4--8 for the cytosol and a maximum of 6.5--7.5 with microsomal preparations. 2. At low concentrations (0--5 mM) Mg2+ produced a slight stimulation of the cytosol activity but at higher concentrations an inhibition was observed. Low concentrations (1.0--2.0 mM) of EDTA abolished the cytosol activity and reduced the microsomal activity to half. In both cases, the addition of Mg2+ in the presence of EDTA resulted in an activity which was more than 2-fold greater than that observed in the absence of chelator or divalent cation. 3. The cytosol activity was relatively resistant to the addition of ionic and nonionic detergents. In general, the addition of a number of phosphate esters increased rather than decreased the release of 32Pi, indicating a relative specificity for phosphate groups associated with a hydrophobic environment. The addition of aqueous dispersions of phosphatidate, lysophosphatidic acid or phosphatidylglycerophosphate markedly reduced the hydrolysis of membrane-bound [32P]phosphatidate. The cytosol activity was slightly inhibited by the addition of phosphatidylcholine. 4. In an attempt to estimate the relative contributions of the cytosol and microsomal activities in vivo, these activities were assayed using [32P]phosphatidate endogenously generated on rat lung microsomes. With the 32P-labelled microsomes, the hydrolysis remained linear over the 45 min of the experiment. Addition of high speed supernatant produced a rapid release of 32Pi during the first 10 min followed by a more gradual release similar to that oberved with the microsomes alone. The cytosol activity remained greater than the microsomal activity at all times studied. 5. When [14C]phosphatidate-labelled microsomes were incubated in the presence of nonradioactive CDPcholine, the addition of cytosol markedly stimulated the incorporation of radioactivity into phosphatidylcholine. This observation suggests that the phosphatidic acid phosphatase activity associated with the cytosol has a role in phosphatidylcholine (and presumably surfactant) biosynthesis in rat lung.