We demonstrated previously that Calu-3 airway epithelial cells sense adenosine on their luminal surface through adenosine A2B receptors coupled to adenylyl cyclase. Occupancy of these receptors leads to activation of the cystic fibrosis transmembrane conductance regulator (CFTR) chloride channel through protein kinase A (PKA) anchored at the apical membrane. Because luminal A2B receptor activation does not raise total cellular cAMP levels, we hypothesized that activation of phosphodiesterases (PDEs) confines cAMP generated by apical A2B receptors to a microdomain that includes the CFTR channel. Using reverse transcription-PCR, Western blotting, and activity measurements, PDE4D was identified as the major PDE species in airway epithelia. Consistent with these results, inhibitors of PDE4, but not PDE3, selectively abolished the lateral confinement of cAMP signaling in apical membrane patches during cell-attached recordings. Furthermore, stimulation of the CFTR in excised apical patches by rolipram and RS25344 indicated that PDE4 is localized in close proximity to the CFTR channel. Indeed, immunohistochemistry of human airway sections revealed that PDE4D is localized in the apical domain of the cell. PDE4 was activated after luminal adenosine exposure in a PKA-dependent manner. Because PDE4 activity is positively regulated by PKA, our results support a model whereby the PDE diffusion barrier is proportional to the degree of receptor stimulation. These findings underscore the concept that subcellular localization of individual PDE isozymes is an important mechanism for confining cAMP signaling to functional domains within cells.