The influence of the hydrophobic proteins SP-B and SP-C, isolated from pulmonary surfactant, on the morphology of binary monomolecular lipid films containing phosphocholine and phosphoglycerol (DPPC and DPPG) at the air-water interface has been studied using epifluorescence and dark-field microscopy. In contrast to previously published studies, the monolayer experiments used the entire hydrophobic surfactant protein fraction (containing both the SP-B and SP-C peptides) at physiologically relevant concentrations (approximately 1 wt %). Even at such low levels, the SP-B/C peptides induce the formation of a new phase in the surface monolayer that is of lower intrinsic order than the liquid condensed (LC) phase that forms in the pure lipid mixture. This presumably leads to a higher structural flexibility of the surface monolayer at high lateral pressure. Variation of the subphase pH indicates that electrostatic interaction dominates the association of the SP-B/C peptides with the lipid monolayer. As evidenced from dark-field microscopy, monolayer material is excluded from the DPPC/DPPG surface film on compression and forms three-dimensional, surface-associated structures of micron dimensions. Such exclusion bodies formed only with SP-B/C peptides. This observation provides the first direct optical evidence for the squeeze-out of pulmonary surfactant material in situ at the air-water interface upon increasing monolayer surface pressures.