Rats were exposed to either NO2 or O3 to determine whether nonciliated cells (Clara cells) could divide and differentiate into ciliated cells in the terminal bronchioles. Dividing cells were labeled with tritiated thymidine, visualized in the light and electron microscopes using autoradiographic techniques, and studied for up to 15 days after labeling. Electron microscopic autoradiography 1 hour after injection of tritiated thymidine showed that all labeled cells in the terminal bronchioles were nonciliated. However, 4 days after injection of tritiated thymidine, 67.8 per cent of the labeled cells were nonciliated and 32.2 per cent were ciliated. Light microscopic autoradiography showed that the new labeled ciliated cell population was stable for up to 15 days. These results indicate that nonciliated cells divide and the sister cells may form new ciliated and nonciliated cells. Thus, nonciliated cells can act as progenitor cells for the terminal bronchiolar epithelium.