Alveolar macrophages (AM) are the most abundant antigen presenting cells in the lungs and they play a critical role in regulating pulmonary immune responses to inhaled pathogens and to allergens. However, compared to macrophages in other body sites, AM have an unusual phenotype that in many respects resembles that of dendritic cells (DC). Therefore, to more fully define the unique nature of AM, we compared the phenotype and function of AM to that of resident peritoneal macrophages (PLM). We found striking phenotypic differences between AM and PLM, particularly with regard to CD11c expression, and also observed that AM were significantly better at presenting antigens than PLM. Therefore, we investigated the role of the local airway environment in generating the unusual phenotype of AM. To address this question, cell transfer experiments were done to compare macrophage differentiation in the airways with differentiation in the peritoneal cavity. We observed significant upregulation of CD11c expression on both bone marrow macrophages and peritoneal macrophages when they were adoptively transferred into the airways. In contrast, CD11c expression was not upregulated following cell transfer into the peritoneal cavity, whereas expression of CD11b was significantly increased. In vitro, culture of bone marrow adherent cells with surfactant protein D (SP-D) or GM-CSF induced significant upregulation of CD11c expression, and in vivo GM-CSF concentrations were significantly higher in bronchoalveolar lavage fluid than in peritoneal lavage fluid. Finally, GM-CSF^-/-mice failed to develop CD11c⁺ AM, though these cells were still present in SP-D^-/- mice. However, macrophages from GM-CSF^-/- bone marrow could upregulate CD11c expression when transferred to the airways of wild type mice. These results suggest that the airway environment promotes the development of macrophages with unique DC-like characteristics and that this unusual phenotype is determined to a large degree by locally high concentrations of GM-CSF and possibly SP-D.