1. The isolated perfused rat lung was used as the principal model to study surfactant cholesterol metabolism. 2. Cholesterol was found to represent over 50% of the neutral lipid of both the total surfactant and the lamellar body fractions. 3. De novo synthesis of cholesterol from [1-14C]acetate accounted for only 1% of the surfactant cholesterol, the remainder being derived from exogenous cholesterol supplied as serum lipoproteins. 4. Lipoprotein [1,2-3H2]cholesterol was incorporated into the lamellar body and extracellular surfactant fractions. The increase in the cholesterol specific activities of these fractions with time was consistent with a precursor-product relationship between the lamellar body cholesterol and that of the extracellular surfactant. 5. Incorporation of [methyl-14C]choline and [1,2-3H2]cholesterol indicated that the metabolism and secretion of lamellar body and extracellular surfactant cholesterol parallels that of phosphatidylcholine and suggests that most if not all extracellular surfactant cholesterol is derived from the lamellar body. 6. Comparison of the relative specific activities of incorporated [1,2-3H2]-cholesterol indicate that 59% of the total surfactant cholesterol is located extracellularly.