Synthesis of pulmonary surfactant (PS) is necessary for normal functioning of the lungs and its production is indicative of normal differentiated lung. The human alveolar carcinoma, A549, has been found to synthesis and secrete PS in vitro. The purpose of this study was to optimise the culture conditions for PS synthesis by A549 as well as to determine the potential role of foetal lung fibroblasts in the induction of PS by glucocorticoids. A549 cells growing in filter wells produced higher levels of PS in response to steroid, a 5-fold increase on the filter well compared to only a 1.5-fold increase when the cells were cultured on a conventional plastic substrate. A549 cells grown in filter wells responded to coculture with fibroblasts whether in direct contact or separated co-culture. A 20-fold increase in PS over control values was observed in separated steroid-treated co-cultures, suggesting the presence of a diffusible factor. A partially purified factor was isolated from fibroblast conditioned medium which was capable of inducing differentiation and other phenotypic changes in A549, namely induction of PS, reduction of plasminogen activator activity and reduction in the in vivo growth of A549 xenografts in nude mice. These results suggest that, under the correct conditions, A549 cells, although transformed, still retain the capacity to respond to differentiation-inducing signals from normal fibroblasts.