Madin-Darby canine kidney epithelial cells form three-dimensional cysts in spinner culture with a defined cell surface polarity. Transfer of cysts from spinner culture to a collagen gel matrix results in rapid loss of apical membrane proteins from the outside surface of the cyst, degradation of extracellular matrix (ECM) from the cyst lumen, and de novo formation of the apical membrane at the luminal surface. Degradation of endogenous ECM was inhibited with 1,10-phenanthroline, an inhibitor of metalloproteinases, resulting in cysts in which cells are surrounded by either cell-cell or cell-substratum contacts. The consequence of the lack of a free cell surface on the formation of a new apical membrane domain in these cysts was analyzed. Changes in cell surface polarity were followed with antibodies to marker proteins of the apical or basolateral membranes. In the absence of a free cell surface, the apical membrane formed de novo by accumulation and fusion of presorted vesicles containing apical membrane proteins; the coalescence of these vesicles results in the formation of a central lumen. These results provide novel insights into the generation of membrane domains and formation of a lumen in complex, three-dimensional epithelial structures in development.