Alveolar cell carcinoma is an unusual pulmonary neoplasm composed of cells with the ultrastructural features of granular pneumocytes. In the past this lesion has been grouped with peripheral well-differentiated mucin-secreting adenocarcinomas under the heading of bronchiolo-alveolar cell carcinoma. Because the existence of alveolar cell carcinoma as a distinct entity has been disputed, we examined a case ultrastructurally and confirmed that the neoplastic cells exhibit granular pneumocyte differentiation (lamellar bodies and abundant surface microvilli). In addition, we have growth this tumor in organ culture for up to 5 months and have documented the persistence of granular pneumocyte differentiation during this period. The accumulated evidence from human and animal studies that the granular pneumocyte may undergo neoplastic transformation is briefly reviewed. We conclude that alveolar cell carcinoma is a distinct entity; however, the elucidation of its natural history must await series that separate this lesion from other pulmonary carcinomas.