Human bronchial epithelial cells transformed by either DNA virus infection (SV40 or Adenovirus 12-SV40 hybrid virus) or transfection with the SV40 large T antigen gene were studied for their ability to undergo squamous differentiation when exposed to 12-O-tetradecanoylphorbol-13 acetate (TPA), transforming growth factor-beta 1 (TGF-beta 1), or fetal bovine serum (FBS), agents that induce the squamous differentiation of normal human bronchial epithelial cells. Squamous differentiation occurred in all ten T-antigen-positive cell cultures when they were exposed to either FBS or TGF-beta 1, but none differentiated when exposed to TPA. From one cell line, designated BEAS-2B, two subclones were isolated, one of which was induced to undergo squamous differentiation by FBS, and a second that failed to undergo squamous differentiation and was mitogenically stimulated when exposed to serum. These phenotypically different subclones provide a new in vitro cellular system for delineating the mechanism(s) of human bronchial epithelial cell squamous differentiation in response to FBS or TGF-beta 1.