Although the presence of cholesterol, the major neutral lipid component, is well known in native surfactants (upto 10 % mass), its role in the surfactant remains uncertain. The most recently FDA approved clinical surfactant contain cholesterol, while two that have been used for 20 years have cholesterol carefully removed. However, they are all successful in treating neonatal respiratory distress syndrome (NRDS) resulting from a lack of surfactant. As a result the optimal concentration of cholesterol, if any at all, remains debated. Here we present indications for an optimal cholesterol concentration by presenting alterations to the phase and morphology of Survanta, a clinically used bovine lung surfactant extract, induced by both physiological and elevated concentrations of cholesterol when the monolayer is in contact with surfactant in the subphase. We find that low cholesterol concentrations (1-2 wt %) help to achieve a lower surface tension by enhancing surfactant material adsorption to the interface. However, increasing the cholesterol concentrations to higher values (≈ 20 wt %) significantly alters the normal surfactant isotherm. Alterations in a typical signature plateau for Survanta at ∼ 40 mN/m are noted suggesting a change in the solid phase fraction of the film. Fluorescence microscopic imaging reveals the coexistence of discrete monolayer along with “multilayer reservoir” adjacent to the air/water interface. Differences in the collapse structures of the monolayer are also noted indicating an alteration in the mechanical properties of the monolayer film. Alterations in these properties in the absence of surface active lung surfactant proteins were also observed indicating that interactions between the monolayer at the interface, the “multilayer reservoir” and the subphase are essential for the proper functioning of the lung surfactant.