Lemon trees are generated naturally in forests and hills, including forested hills. If you are using an existing world, you will only see lemon trees appear in previously unexplored terrain.
Lemon trees will shed lemons over time, the amount limited to no more than 8 dropped lemons underneath a lemon tree at any one time. When broken, the leaf blocks of lemon trees have a chance of dropping a lemon.
To plant a lemon tree, you simply plant lemon seeds on grass or dirt, a sapling will spring out of the ground where you place the seeds. The wood of a lemon tree is equivalent to birch wood. (Note however that a real-life lemon tree is actually in the pine family.)
Lemons cannot be eaten directly, but are used as an ingredient in Mayonaisse.
Lemonade is crafted by placing a lemon and some sugar above a glass bottle in the crafting grid.
Lemon seeds can be obtained via placing a lemon in the crafting grid, or by combining Hybrid seeds with Dandelion Yellow dye.