Which is correct? Therein lies the problem. or, Therein lays the problem.
Therein lies the problem is the correct expression.

The Microsoft spell checker sometimes suggests lays, but this does not sound right to the ear! The spellchecker can get a bit befuddled like this sometimes.

If the problem occurred in the past you would say Therein lay the problem.

- Nick
Therein lies the problem
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Microsoft Word lies, and therein lies the problem!
Lie is a tricky word and it gets confusing when you are using the past simple or past participle versions of it. The following categorization might help your possible confusion.

Present, past simple, Past Participle

1. lie: not telling the truth lie, lied, lied
2. lie: become horizontal lie, lay , lain
3. lay:put lay, laid, laid