The purpose of our studies was to determine the growth and differentiation potential of Clara cells isolated from rabbit lungs. The Clara cell preparations were enriched (80 to 85%) by density gradient-elutriation procedures and then were inoculated into rat tracheas denuded of their own epithelium. These tracheas then were transplanted subcutaneously on the backs of nude mice. For purposes of comparison, other denuded tracheas were inoculated with mixed epithelial cells obtained from rabbit tracheas by enzymatic procedures. Control tracheas were inoculated with cell-free media. At 2, 4, and 14 weeks after transplantation, the tracheal grafts were removed from the recipient nude mice and examined by light and electron microscopy. Tracheal grafts not receiving cell inocula contained no epithelial lining, and the tracheal lumens were filled with loose connective tissue. Tracheas inoculated with 2 x 104 mixed tracheal cells showed a columnar, pseudostratified epithelium composed of five cell types: (a) poorly-differentiated cells, (b) ciliated cells, (c) mucous cells, (d) Clara-like cells, and (e) typical basal cells. A very different epithelium was established in tracheas repopulated with Clara cell isolates. This epithelium, at all time points examined, was cuboidal, single layered (never pseudostratified), and lacked basal cells. The tracheal lumens were lined with ciliated and nonciliated cells. The latter showed typical features of mature Clara cells (i.e., electron dense granules and smooth endoplasmic reticulum). At 14 weeks, the same two cell types were present, and often they were located on ridges and furrows of the tracheal walls. Mixed tracheal cells inoculated into denuded tracheas gave rise to a normal-appearing pseudostratified mucociliary epithelium, whereas the Clara cells inoculated under identical conditions gave rise to a low cuboidal epithelium resembling that seen in normal bronchioles. Establishment of these two types of epithelial linings occurred in the presence of the same mesenchymal components. Thus, we conclude that Clara cells have considerable self-renewal capacity, and their differentiation potential appears to be quite narrow.