The squid giant axon and extruded axoplasm from the giant axon were used to study the capacity of axoplasm for phospholipid synthesis. Extruded axoplasm, suspended in chemically defined media, catalyzed the synthesis of phospholipids from all of the precursors tested. 32P-Labeled inorganic phosphate and gamma-labeled ATP were actively incorporated into phosphatidylinositol phosphate, while [2-3H]myo-inositol and L-[3H(G)]serine were actively incorporated into phosphatidylinositol and phosphatidylserine, respectively. Though less well utilized. [2-3H]glycerol was incorporated into phosphatidic acid, phosphatidylinositol, and triglyceride, and methyl-3H]choline and [1-3H]ethanolamine were incorporated into phosphatidylcholine and phosphatidylethanolamine, respectively. Isolated squid giant axons were incubated in artificial seawater containing the above precursors. The axoplasm was extruded following the incubations. Although most of the product lipids were recovered in the sheath (composed of cortical axoplasm, axolemma, and surrounding satellite cells), significant amounts (4-20%) were present in the extruded axoplasm. With tritiated choline and myo-inositol, the major labeled phospholipids found in both the extruded axoplasm and the sheath were phosphatidylcholine and phosphatidylinositol, respectively. With both glycerol and phosphate, phosphatidylethanolamine was a major labeled lipid in both axoplasm and sheath. These findings demonstrate that all classes of phospholipids are formed by endogenous synthetic enzymes in axoplasm. In addition, we feel that the different patterns of incorporation by intact axons and extruded axoplasm indicate that surrounding sheath cells contribute lipids to axoplasm. A comprehensive picture of axonal lipid metabolism should include axoplasmic synthesis and glial-axon transfer as pathways complementing the axonal transport of perikaryally formed lipids.