Alkyl-dihydroxyacetonephosphate synthase is a peroxisomal enzyme involved in ether lipid synthesis. It catalyzes the exchange of the acyl chain in acyl-dihydroxyacetonephosphate for a long chain fatty alcohol, yielding the first ether linked intermediate, i.e. alkyl-dihydroxyacetonephosphate, in the pathway of ether lipid biosynthesis. Although this reaction is not a net redox reaction, the amino acid sequence of the enzyme suggested the presence of a flavin adenine dinucleotide (FAD)-binding domain. In this study we show that alkyl-dihydroxyacetonephosphate synthase contains an essential FAD molecule as cofactor, which is evidenced by fluorescence properties, UV-visible absorption spectra and the observation that the enzyme activity is dependent on the presence of this cofactor in a coupled in vitro transcription/translation assay. Furthermore, we could demonstrate that the FAD cofactor directly participates in catalysis. Upon incubation of the enzyme with the substrate palmitoyl-dihydroxyacetonephosphate, the flavin moiety is reduced, indicating that in this initial step the substrate is oxidized. Stopped flow experiments show that the reduction of the flavin moiety is a monophasic process yielding a oxygen stable, reduced enzyme species. Upon addition of hexadecanol to the reduced enzyme species, the flavin moiety is efficiently reoxidized. A hypothetical reaction mechanism is proposed that is consistent with the data in this paper and with previous studies.