Controversies and risks continue to be reported about exogenous mesenchymal stem cell-based therapies. In contrast with employing exogenous stem cells, making use of lung resident mesenchymal stem cells (LR-MSCs) could be advantageous. Our study sought to isolate the LR-MSCs and explore their potential to differentiate into alveolar epithelial type II cells (ATII cells). Total lung cells were first precultured, from which the Sca-1(+) CD45(-) CD31(-) population was purified using fluorescence activated cell sorting (FACS). By these methods, it would seem that the Sca-1(+) CD45(-) CD31(-) cells were LR-MSCs. Similar to bone marrow derived mesenchymal stem cells (BM-MSCs), these cells express Sca-1, CD29, CD90, CD44 and CD106, but not CD31 or CD45. They share the same gene expression file with the BM-MSCs and have a similar DNA content during long-term culturing. Furthermore, they could be serially passaged with all these properties being sustained. Above all, LR-MSCs could differentiate into ATII cells when co-cultured with ATII cells in a trans-well system. These findings demonstrated that the Sca-1(+) CD45(-) CD31(-) cells appear to be LR-MSCs that can differentiate into ATII cells. This approach may hold promise for their use in the treatment of lung disease.