The sensitivity of Laurdan (6-dodecanoyl-2-dimethylaminonaphthalene) excitation and emission spectra to the physical state of the membrane arises from dipolar relaxation processes in the membrane region surrounding the Laurdan molecule. Experiments performed using phospholipid vesicles composed of phospholipids with different polar head groups show that this part of the molecule is not responsible for the observed effects. Also, pH titration in the range from pH 4 to 10 shows that the spectral variations are independent of the charge of the polar head. A two-state model of dipolar relaxation is used to qualitatively explain the behavior of Laurdan. It is concluded that the presence of water molecules in the phospholipid matrix are responsible for the spectral properties of Laurdan in the gel phase. In the liquid crystalline phase there is a relaxation process that we attribute to water molecules that can reorientate during the few nanoseconds of the excited state lifetime. The quantitation of lipid phases is obtained using generalized polarization which, after proper choice of excitation and emission wavelengths, satisfies a simple addition rule.