The pluripotency and high proliferative index of embryonic stem (ES) cells make them a good potential source of cells for tissue engineering purposes. We have shown that ES cells can be induced to differentiate in vitro into pulmonary epithelial cells (type II pneumocytes) using a serum-free medium designed for the maintenance of mature distal lung epithelial cells in culture (SAGM). However, the resulting cell cultures were heterogeneous. Our aim in this study was to attempt to increase pneumocyte yield and differentiation state by determining which medium components enhance the differentiation of pneumocytes and modifying the medium accordingly. Quantitative RT-PCR was used to measure changes in the expression of a type II pneumocyte-specific gene, surfactant protein C (SPC), in response to alterations in the cell culture medium. Results suggested that most individual SAGM growth factors were inhibitory for type II pneumocyte differentiation, with the largest increases in SPC expression (approximately threefold) being observed upon removal of retinoic acid and triiodothryonine. However, large standard deviations occurred between replicates, illustrating the highly variable nature of ES cell differentiation. Nevertheless, these observations represent an initial step towards achieving directed differentiation of pneumocytes from stem cells that could lead to their purification for tissue engineering purposes.