Enzymatically dissociated lungs from rat fetuses at 19-days gestation yield single cells which reaggregate to form alveolar-like structures when cultured on gelatin sponge discs. These structures form within 2 days and have been maintained in vitro for as long as 6 weeks. They are composed primarily of type II pneumonocytes as characterized by large, lightly stained nuclei and cytoplasmic inclusion bodies. The lamellar structure of these inclusion bodies has been confirmed by electron microscopy. The dynamic formation of inclusion bodies is suggested by the presence of lamellar bodies in the extra-cellular space and the appearance of new inclusions in the cytoplasm of the type II pneumonocytes. The formation and long-term maintenance of histotypic lung structures in vitro provides a model system for the study of lung development and synthesis of surfactant by type II alveolar pneumonocytes.