Diffusing capacity of the lung (DLco) is one of the most sensitive tests of lung function that can be performed in an outpatient setting. Also known as the transfer factor for carbon monoxide (TLco), diffusing capacity measures the efficiency of transfer of gas (usually carbon monoxide) from the alveolar gas to the red blood cells within the pulmonary capillaries. This chapter discusses the physiology of gas diffusion across biological membranes, and deconstructs the causes for abnormal DLco levels based on pathophysiology, and incorporates a rational strategy for diagnosis in various clinical situations. Caveats in the interpretation of DLco are also discussed, especially in relation to KCO (the ratio between the DLco and the alveolar volume) and the artefacts possible in the test.