The Clara cell is believed to be the progenitor of the peripheral airway epithelium, and it produces the surfactant proteins SP-A and SP-B, in addition to the 10-kDa Clara cell secretory protein (CCSP or CC10). To date, attempts to develop Clara cell lines have been unsuccessful. Most such attempts have involved the in vitro insertion of a transforming viral oncogene. We have reported previously the characterization of a differentiated conditionally immortalized murine lung Type II epithelial cell line, T7, from the H-2K^b-tsA58 transgenic mouse. We have also used this mouse model to derive Clara cell lines. In this model, the need for in vitro gene insertion is circumvented by the creation of a transgene, in which the large tumor antigen of a temperature-sensitive strain (tsA58) of the simian virus 40 (SV40) is fused with the major histocompatibility complex promoter H-2K^b. The promoter is active in a wide range of tissues and is induced by interferons (IFN). From the lungs of animals harboring the hybrid construct, we isolated and characterized Clara cells. The cells contain dense secretory granules and mitochondria typical of Clara cells, and express SP-A, SP-B, SP-D, and the Clara cell secretory protein, CC10. Withdrawal of the IFN and elevation of the incubation temperature permit normal cell differentiation similar to that of Clara cells in vivo. This cell line should be very useful for the investigation of normal Clara cell function and gene expression.