A fundamental aspect in the morphogenesis of a polarized epithelium is the formation of structurally and functionally distinct apical and basal-lateral domains of the plasma membrane. The formation of these membrane domains involves the accumulation of domain-specific proteins and removal of incorrectly localized proteins. The mechanisms involved in these processes are not well understood. We have approached this problem by detailed analysis of the distribution and fate of proteins specific for different membrane domains during reversal of epithelial polarity. In the preceding paper we showed that MDCK cells form multicellular cysts comprising a closed monolayer of polarized cells. The orientation of cell polarity depends upon whether cysts are formed in suspension culture or in a collagen gel. Here, we show that, when fully developed cysts formed in suspension culture are placed in a collagen gel, polarity is rapidly reversed without cell dissociation. We show that during the process of polarity reversal, plasma membrane domains are disassembled by uptake of proteins into cytoplasmic vesicles, followed by protein degradation that probably occurs in lysosomes. The disassembly and assembly of the apical and the basal-lateral membrane domains occur in a sequential order with different kinetics. Our results provide further insights into the establishment of protein specificity of plasma membrane domains in polarized cells.