Alveolar type (AT)I and ATII cells are central to maintaining normal alveolar fluid homeostasis. When disrupted, they contribute to the pathogenesis of acute lung injury (ALI) and acute respiratory distress syndrome. Research on ATII cells has been limited by the inability to propagate primary cells in vitro to study their specific functional properties. Moreover, primary ATII cells in vitro quickly transdifferentiate into nonproliferative “ATI-like” cells under traditional culture conditions. Recent studies have demonstrated that normal and tumor cells grown in culture with a combination of fibroblast (feeder cells) and a pharmacological Rho kinase inhibitor (Y-27632) exhibit indefinite cell proliferation that resembled a “conditionally reprogrammed cell” phenotype. Using this coculture system, we found that primary human ATII cells (1) proliferated at an exponential rate, (2) established epithelial colonies expressing ATII-specific and “ATI-like” mRNA and proteins after serial passage, (3) up-regulated genes important in cell proliferation and migration, and (4) on removal of feeder cells and Rho kinase inhibitor under air–liquid interface conditions, exhibited bioelectric and volume transport characteristics similar to freshly cultured ATII cells. Collectively, our results demonstrate that this novel coculture technique breaks the in vitro ATII cell proliferation barrier while retaining cell-specific functional properties. This work will allow for a significant increase in studies designed to elucidate ATII cell function with the goal of accelerating the development of novel therapies for alveolar diseases.