Pulmonary surfactant (PS) is a complicated mixture of approximately 90% lipids and 10% proteins. It plays an important role in maintaining normal respiratory mechanics by reducing alveolar surface tension to near-zero values. Supplementing exogenous surfactant to newborns suffering from respiratory distress syndrome (RDS), a leading cause of perinatal mortality, has completely altered neonatal care in industrialized countries. Surfactant therapy has also been applied to the acute respiratory distress syndrome (ARDS) but with only limited success. Biophysical studies suggest that surfactant inhibition is partially responsible for this unsatisfactory performance. This paper reviews the biophysical properties of functional and dysfunctional PS. The biophysical properties of PS are further limited to surface activity, i.e., properties related to highly dynamic and very low surface tensions. Three main perspectives are reviewed. (1) How does PS permit both rapid adsorption and the ability to reach very low surface tensions? (2) How is PS inactivated by different inhibitory substances and how can this inhibition be counteracted? A recent research focus of using water-soluble polymers as additives to enhance the surface activity of clinical PS and to overcome inhibition is extensively discussed. (3) Which in vivo, in situ, and in vitro methods are available for evaluating the surface activity of PS and what are their relative merits? A better understanding of the biophysical properties of functional and dysfunctional PS is important for the further development of surfactant therapy, especially for its potential application in ARDS.