Complete absence of SP-B leads to RDS and neonatal death in homozygous SP-B knockout mice. SP-B is synthesized as a 381 amino acid preproprotein which is processed to the 79 amino acid mature peptide by sequential cleavage of the 177 residue N-terminal propeptide and the 102 residue C-terminal propeptide. The N-terminal propeptide has previously been shown to be essential for the intracellular trafficking of the mature peptide and for targeting of SP-B to the lamellar body. In the present study, the function of the 102 amino acid C-terminal propeptide of SP-B was analyzed by characterizing the phenotype associated with loss of expression of this peptide domain in transgenic mice. A construct encoding the signal peptide, N-terminal propeptide and mature peptide of human SP-B (hSP-Bæc) was cloned under the control of the 3.7 kb human SP-C promoter and injected into fertilized eggs of the FVB/N mouse strain. Founder mice expressing the hSP-Bæc transgene were bred with heterozygous SP-B knockout mice (SP-B +/-). Offspring containing the transgene and one allele of mouse SP-B were identified and subsequently crossed to generate a transgenic line with expressed SP-Bæc in a null background (SP-B[-/-]/hSP-Bæc[+/+]). Expression of hSP-Bæc in SP-B(-/-) mice was restricted to Type II cells and resulted in a 2-fold increase in mature SP-B relative to wild type littermates. These mice survived without any evidence of respiratory problems and had normal lung function, normal alveolar surfactant phospholipid pool sizes, and typical tubular myelin indicating that the 102 residue C-terminal propeptide of SP-B is not required for normal structure and function of extracellular surfactant. However, proteolytic processing of the SP-C proprotein was perturbed resulting in the accumulation of a processing intermediate, Mr=11k; further, lamellar bodies in Type II cells of SP-B(-/-)/hSP-Bæc(+/+) mice were much larger than in the wild type animal and saturated phosphatidylcholine content in lung tissue was significantly increased. Collectively, these results demonstrate a role for the C-terminal propeptide of SP-B in SP-C processing and the regulation of intracellular surfactant pool size. (Supported by HL36055, HL56285 and HL51832 to TEW)