Type II epithelial cells synthesize and secrete pulmonary surfactant, a complex mixture of phospholipids and proteins that reduces surface tension along the alveolar air-liquid interface at end respiration. The peptide components of surfactant, in particular surfactant protein B (SP-B 1 ) and SP-C, are critical for surfactant film formation and function. Newborn infants and mice lacking SP-B have dramatically reduced pulmonary compliance and develop lethal, respiratory distress syndrome shortly after birth (1, 2). Disruption of the SP-B locus results in incomplete processing of pro-SP-C to its mature peptide, leading to deficiency of both SP-C and SP-B. SP-C null mice have normal levels of SP-B and survive with subtle changes in lung function but normal lung structure and surfactant pool sizes. The importance of SP-C for normal lung function is inferred from experiments in which intratracheal administration of surfactant containing SP-C as the sole protein component to preterm animals restored lung function to values comparable with animals treated with native surfactant (3-5). Collectively, these results suggest that SP-C and SP-B are functionally interchangeable with respect to biophysical activity. SP-C is synthesized by the alveolar type II epithelial cell as a 197-amino acid proprotein in which the mature peptide (residues 24 -58) is flanked by N-terminal (residues 1-23) and C-terminal (residues 59 -197) peptide domains. Unlike SP-B, SP-C is an integral membrane protein, which contains a single membrane-spanning domain located within the mature peptide (6). The topology of the SP-C proprotein in the membrane is not clear, with reports of both type II (7) and type III (8) orientations. SP-C proprotein is detected in endoplasmic reticulum, Golgi, and multivesicular bodies but not in lamellar bodies, the intracellular storage compartment for pulmonary surfactant (8, 9). Processing of the proprotein results in cleavage of the propeptides and generation of the 35-amino acid mature peptide that is detected only in the multivesicular body and lamellar body (8, 10). Colocalization of both proprotein and mature peptide in the multivesicular body strongly suggests that processing of the SP-C precursor to the biologically active peptide occurs within this compartment.In order to promote absorption and spreading of surfactant lipids at the alveolar air-liquid interface, mature SP-C peptide must be secreted by the type II cell. The mature peptide consists of an extremely hydrophobic transmembrane domain and a 10 -12-amino acid extramembrane domain that contains palmitoylated cysteines at positions 5 and 6 (residues 28 and 29 of the proprotein) in most species (11-13). The mechanism underlying secretion of this integral membrane peptide is not clear but probably involves two discrete steps. The proprotein is first sorted to the multivesicular body that ultimately fuses with the lamellar body, a lysosome-related organelle. Sorting of integral membrane proteins to lysosomes and secretory granules is dependent upon informat...