Rat surfactant protein (SP)-C is a 3.7-kD hydrophobic lung-specific protein generated from proteolytic processing of a 21-kD propeptide (SP-C(21)). We have demonstrated that initial post-translational processing of SP-C(21) involves two cleavages of the COOH-terminus (Beers and colleagues, J. Biol. Chem. 1994;269:20,318--20,328). The goal of the current study was to define processing and function of the NH(2)-terminal flanking domain. Epitope-specific antisera directed against spatially distinct regions of the NH(2) terminus, NPROSP-C(2-9) (epitope = D(2)-L(9)) and NPROSP-C(11-23) (= E(11)-Q(23)) were produced. By Western blotting, both antisera identified SP-C(21) in microsomes. A 6-kD form (SP-C(6)), enriched in lamellar bodies (LBs), was detected only by NPROSP-C(11-23) and not extractable with NaCO(3) treatment. Immunogold staining of ultrathin lung sections with NPROSP-C(11-23) identified proSP-C in both multivesicular bodies (mvb) and LBs whereas NPROSP-C(2-9) labeled only mvb. (35)S-pulse chase analysis demonstrated synthesis of SP-C(21) and three intermediate forms (SP-C(16), SP-C(7), and SP-C(6)). Complete processing involved four separate cleavages with a precursor- product relationship between the low molecular weight forms SP-C(7) and SP-C(6). Fluorescence microscopy of A549 cells expressing fusion proteins of enhanced green fluorescent protein (EGFP) and proSP-C NH(2)-terminal deletion mutants showed targeting of EGFP/SP-C(1-194) and EGFP/SP-C(10-194) to early endosomal antigen-1-negative, CD-63-positive cytoplasmic vesicles whereas EGFP/SP-C(19-194), EGFP/SP-C(Delta 10-18), and EGFP/SP-C(24-194) were restricted to the endoplasmic reticulum (ER). We conclude that synthetic processing includes a previously unrecognized cleavage of the proximal NH(2) terminus (M(1)-L(9)), which occurs after removal of COOH-flanking domains (H(59)-I(194)) but before packaging in LBs, and that the region M(10)-T(18) is required for targeting of proSP-C to post-ER vesicular compartments in the biosynthetic pathway.