This paper describes the preparation of lung acellular alveolar matrix fragments and culture of rat type II pneumocytes directly on the alveolar epithelial basement membrane, thereby permitting study of the effect of lung basement membrane on the morphology and function of type II cells. Collagen types I, III, IV and V, laminin and fibronectin were located by immunofluorescence in the lung matrix with the same patterns as those described for the normal human lung. Transmission electron microscopy (TEM) of the fragments revealed intact epithelial and endothelial basement membranes. The matrix maintained the normal three-dimensional alveolar architecture. Glycosaminoglycans were still present by Alcian Blue staining. Isolated adult rat type II pneumocytes cultured on 150 micron thick fragments of acellular human alveolar extracellular matrix undergo gradual cytoplasmic flattening, with loss of lamellar bodies, mitochondria, and surface microvilli. These changes are similar to the in vivo differentiation of type II pneumocytes into type I pneumocytes. The type II pneumocyte behaviour on the lung epithelial basement membrane contrasted sharply with that of the same cell type cultured on a human amnionic basement membrane. On the latter surface the cells retained their cuboidal shape, lamellar bodies and surface microvilli for up to 8 days. These observations suggest that the basement membranes from different organ systems exert differing influences on the morphology and function of type II pneumocytes and that the alveolar and amnionic basement membranes may have differing three-dimensional organizations. The technique of direct culture of type II cells on the lung basement membrane provides a useful tool for studying the modulating effect of the basement membrane on alveolar epithelial cells.