Many organs consist of a hollow cavity surrounded by a monolayer of epithelial cells. Despite their common structure, such organs form by diverse morphogenetic processes. Three-dimensional culture systems have been useful in analyzing the events. Most processes require a combination of cell proliferation and cell death to produce a hollow cavity. Here, we describe a new three-dimensional culture system in which primary human lung alveolar type II cells formed hollow epithelial cysts by a novel process. Individual cells moved, collided, and formed alveolar-like cysts without appreciable proliferation or apoptosis. The alveolar-like cysts consisted of a polarized monolayer of differentiated alveolar type II cells, which secreted surfactant into the central lumen. Blockage of beta1 integrin did not alter cell movement or collision, but it greatly reduced adhesion of cells after collision and subsequent formation of alveolar-like cysts. Treatment of preformed alveolar-like cysts with forskolin increased their diameter, possibly due to stimulation of fluid secretion into the lumen. We conclude that epithelial differentiation and cyst formation can occur without appreciable proliferation or apoptosis.