Understanding cellular processes underlying early lung adenocarcinoma (LUAD) development is needed to devise intervention strategies1. Here, we studied 246,102 single epithelial cells from 16 early-stage LUADs and 47 matched normal lung samples. Epithelial cells comprised diverse normal alveolar and airway lineages as well as cancer cell populations. Diversity among cancer cells was strongly linked to LUAD patient-specific oncogenic drivers. KRAS-mutant cancer cells were unique in their transcriptional features, strikingly reduced differentiation, low levels of DNA copy number changes, and increased variability amongst the cells themselves. The local niche of LUADs, relative to that of normal lungs, was enriched with intermediary cells in lung alveolar differentiation with potential to transition to KRAS-mutant cancer cells. A subset of alveolar intermediate cells with elevated KRT8 expression (KRT8+ alveolar cells; KACs) showed increased plasticity, and their gene expression profiles were enriched in lung precancer and LUAD and signified poor survival. Murine KACs were evident in lungs of tobacco carcinogen-exposed mice that develop KRAS-mutant LUADs but not in the saline-treated control group. While murine KACs emerged prior to tumor onset, they persisted for months after carcinogen cessation, acquired driver Kras mutations and, like their human counterparts, were poorly differentiated and harbored KRAS-specific transcriptional programs. This study provides new insights into early LUAD development and identifies potential targets for treatment.