Fermentation behaviour of Aspergillus terreus lipase was studied in a 10 l fermentor. Lipase production was enhanced to 14?200 U l?1 in 54 h in the fermentor as against 7000 U l?1 in 96 h in shake flasks under optimised nutritional conditions. A 2.4-fold increase in specific activity (16.2 U mg?1 protein) was also attained. Inoculum density, dissolved oxygen levels and agitation were the major controlling factors. A two-step cost-effective downstream processing methodology comprising of an aqueous two-phase system (ATPS) of polyethylene glycol (PEG) and phosphate was devised. This procedure resulted in a 12-fold purification of the lipase with 100% yield in less than 1 h.