Human CD34(+) stem cells differentiated into type-II pneumocytes in Dulbecco's modified Eagle medium (DMEM) having hydrocortisone, insulin, fibroblast growth factor (FGF), epidermal growth factor (EGF) and bovine serum albumin (BSA), expressing surfactant proteins-B (SP-B) and C (SP-C), alkaline phosphatase (ALP) and lysozyme. FACS-enumerated pure CD34(+) cells, isolated from human peripheral blood, were cultured in DMEM and showed positive reaction with anti-human CD34 monoclonal antibodies in immunocytochemistry. These cells were cultured in DMEM having hydrocortisone, insulin, FGF, EGF and BSA (HIFEB-D) medium having an air-liquid interface. They differentiated into type-II pneumocytes with expression of SP-B and SP-C genes and disappearance of CD34 expression as assessed using real-time PCR. In reverse transcription-PCR amplicons showed 208 and 907 bp confirming SP-B and SP-C expressions. These cells expressed ALP with an activity of 1.05 +/- A 0.09 mM ml(-1) min(-1) and lysozyme that killed E. coli. The successful differentiation of human CD34(+) stem cells into type-II pneumocytes, and transplantation of such cells obtained from the patient's stem cell could be the futuristic approach to regenerate diseased lung alveoli.