Immunocytochemical, ultrastructural, and biochemical approaches were used in a series of in vitro and in vivo experiments designed to identify characteristic changes reflecting differentiated type II cell function of A549 cells. Monolayers of A549 cells and A549 clones were maintained in culture for up to 3 weeks. Using an immunoperoxidase (PAP) technique, we demonstrated that variable proportions of A549 cells and of cells in several A549 clones reacted specifically with antibodies to high molecular weight (greater than 400,000) human surfactant-associated glycoproteins (HSAG). The cells of one clone, A549-C12, were consistently negative for HSAG, but their lamellar bodies were similar in appearance and distribution to those found in a PAP-positive clone, A549-C11, as well as in A549 cells. In addition, both C11 and C12 clones displayed time-dependent, divergent differentiation predominantly toward type II epithelium and nonciliated bronchiolar and bronchial cells. Surfactant isolated from either C11 or C12 cells revealed reduced content of disaturated phosphatidylcholine and phosphatidylglycerol when compared to human surfactant; however, a 95,000-dalton peptide immunologically related to HSAG was identified in surfactant from C11 cells but not from the PAP-negative C12 clone. Tumor xenografts produced in athymic (nude) mice following inoculation with cells from C11 and C12 clones exhibited prominent immunoperoxidase staining involving most tumor cells. Cell lines derived from these xenografts (T-11 and T-12) were also enriched in PAP-positive cells. Immunoelectron microscopy indicated that HSAG was localized in the rough endoplasmic reticulum, multivesicular bodies (MVB), intermediate MVB-lamellar forms, and abnormal pleomorphic inclusions. Moreover, two HSAG peptides, both larger than the 34,000-dalton peptide subunit found in normal human surfactant, were present in cells and media from monolayers of the T-11 cell line. We conclude that A549 cells synthesize "defective" HSAG and that the synthesis may be modulated by host factors. The results indicate that appropriate A549 clones can be used effectively as model systems for selected type II cell dysfunctions.