Fluorescence, polarized fluorescence, and Brewster angle microscopy reveal that human lung surfactant protein SP-B and its amine terminus (SP- B1-25) alter the phase behavior of palmitic acid monolayers by inhibiting the formation of condensed phases and creating a new fluid protein-rich phase. This fluid phase forms a network that separates condensed phase domains at coexistence and persists to high surface pressures. The network changes the monolayer collapse mechanism from heterogeneous nucleation/growth and fracturing processes to a more homogeneous process through isolating individual condensed phase domains. This results in higher surface pressures at collapse, and monolayers easier to respread on expansion, factors essential to the in vivo function of lung surfactant. The network is stabilized by a low-line tension between the coexisting phases, as confirmed by the observation of extended linear domains, or 'stripe' phases, and a Gouy-Chapman analysis of protein-containing monolayers. Comparison of isotherm data and observed morphologies of monolayers containing SP-B1- 25 with those containing the full SP-B sequence show that the shortened peptide retains most of the native activity of the full-length protein, which may lead to cheaper and more effective synthetic replacement formulations.