The properties of foam and bubbles arising in the lung have been studied, and evidence has been obtained as to the nature of the alveolar lining. In acute lung oedema, whether accompanied by respiratory movement or not, foam is found in the trachea; it is unaffected by chemical anti-foams, which rapidly destroy the foam formed by shaking oedema fluid with air. A method for obtaining similar foam from excised lung is described. In air-saturated water, bubbles 40 $\mu $ in diameter, obtained from the lung, may be stable for hours, while ordinary bubbles of this size contract and disappear in a few minutes under the influence of surface tension. From observations of these and also from measurements of sessile bubbles, it is shown that their surface tension may be less than 0.06 dyn/cm. The 'stability ratio' of such bubbles is defined. They are stabilized by a layer of insoluble protein about 50 angstrom thick, and it is shown that this can only have had its origin as the original lining of the alveoli of the lungs. If the sharply curved alveolar surface had a surface tension as great as that of blood serum, there would be produced a negative pressure which would draw a transudate from the blood into the alveoli. The lining layer prevents this by reducing the surface tension to nearly zero. From observations on bubbles obtained from the lung under various conditions, it is shown that the lining layer is produced by surface adsorption from a substance (the lung lining substance) present as a jelly or slime lining the small air spaces. In the guinea-pig it develops only late in foetal life. Its peculiar surface properties are not present in blood or in tracheal mucus; it is therefore a specialized secretion and not a transudate from the blood. Methods for preparing atelectatic lung in vitro and for obtaining a solution of the lung lining substance are described. From gastric mucin, which has properties somewhat similar to those of the lung lining substance, a foam highly resistant to anti-foams has been prepared. The possible origin and pathological significance of the lung lining are discussed.