In this study, we report a serum-free culture system for primary neonatal pulmonary cells that can support the growth of octamerbinding transcription factor 4 ؉ (Oct-4 ؉ ) epithelial colonies with a surrounding mesenchymal stroma. In addition to Oct-4, these cells also express other stem cell markers such as stage-specific embryonic antigen 1 (SSEA-1), stem cell antigen 1 (Sca-1), and Clara cell secretion protein (CCSP) but not c-Kit, CD34, and p63, indicating that they represent a subpopulation of Clara cells that have been implicated as lung stem͞progenitor cells in lung injury models. These colony cells can be kept for weeks in primary cultures and undergo terminal differentiation to alveolar type-2-and type-1-like pneumocytes sequentially when removed from the stroma.