Pulmonary surfactant, a mixture of lipids and proteins, reduces the surface tension at the air-water interface of the lung alveoli by forming a surface active film. This way, it prevents alveoli from collapsing and facilitates the work of breathing. Surfactant protein C (SP-C) plays an important role in this surfactant function. SP-C is expressed as a proprotein (proSP-C), which becomes posttranslationally modified with palmitate and undergoes several rounds of proteolytical cleavage. This results in the formation of mature SP-C, which is stored in the lamellar bodies (LB) and finally secreted into the alveolar space. Recently, new insights into the sorting, processing and palmitoylation of proSP-C have been obtained by mutagenesis studies. Moreover, reports on the association of development of lung disease with SP-C deficiency have led to new insights into the importance of SP-C for proper surfactant homeostasis. In addition, new information has become available on the role of the palmitoyl chains of SP-C in surface activity. This review summarizes these recent developments in the processing and function of SP-C, with particular emphasis on the signals for and role of palmitoylation of SP-C.