An in vitro model system in which monodisperase fetal rat lung cells reorganize to form alveolar-like structures when cultured on a gelatin sponge matrix is described. The alveolar-like structures are composed of cells that have morphologic characteristics like those of the type II alveolar pneumonocytes of intact lung. These morphologic characteristics include lightly stained nuclei, microvilli on the apical surface and osmiophilic lamellar bodies in the cytoplasm. The presence of osmiophilic lamellar bodies and tubular myelin in the lumen of the alveolar-like structures suggests that the cells in these structures are producing pulmonary surfactant. The formation and long-term maintenance of these alveolar-like structures provide a unique in vitro model system for studies of the synthesis, storage and secretion of pulmonary surfactant.