Type II cells are the defenders of the alveolus. They produce surfactant to prevent alveolar collapse, they actively transport water to prevent filling of the air sacs that would otherwise prevent gas exchange, and they differentiate to type I epithelial cells. They are an indispensable component of functional lung tissue. To understand the functionality of type II cells in isolation, we sought to track their fate in decellularized matrices and to assess their ability to contribute to barrier function by differentiation to type I alveolar epithelial cells. Rat type II cells were isolated from neonatal rat lungs by labeling with the RTII-70 surface marker and separation using a magnetic column. This produced a population of ∼50% RTII-70-positive cells accompanied by few type I epithelial cells or α-actin-positive mesenchymal cells. This population was seeded into decellularized rat lung matrices and cultured for 1 or 7 days. Culture in Dulbecco's modified Eagle's medium +10% fetal bovine serum (FBS) resulted in reduced expression of epithelial markers and increased expression of mesenchymal markers. By 7 days, no epithelial markers were visible by immunostaining; nearly all cells were α-actin positive. Gene expression for the mesenchymal markers, α-actin, vimentin, and TGF-βR, was significantly upregulated on day 1 (p=0.0005, 0.0005, and 2.342E-5, respectively). Transcript levels of α-actin and TGF-βR remained high at 7 days (p=1.364E-10 and 0.0002). Interestingly, human type II cells cultured under the same conditions showed a similar trend in the loss of epithelial markers, but did not display high expression of mesenchymal markers. Rat cells additionally showed the ability to produce and degrade the basement membrane and extracellular matrix components, such as fibronectin, collagen IV, and collagen I. Quantitative real-time reverse transcription polymerase chain reaction (RT-PCR) showed significant increases in expression of the fibronectin and matrix metalloprotease-2 (MMP-2) genes after 1 day in culture (p=0.0135 and 0.0128, respectively) and elevated collagen I expression at 7 days (p=0.0016). These data suggest that the original type II-enriched population underwent a transition to increased expression of mesenchymal markers, perhaps as part of a survival or wound-healing program. These results suggest that additional medium components and/or the application of physiologically appropriate stimuli such as ventilation may be required to promote lung-specific epithelial phenotypes.