The normal development of the pulmonary system is critical to transitioning from placental-dependent fetal life to alveolar-dependent newborn life. Human lung development and disease have been difficult to study due to the lack of an in vitro model system containing cells from the large airways and distal alveolus. This article describes a system that allows human embryonic stem cells (hESCs) and induced pluripotent stem cells (hiPSCs) to differentiate and form three-dimensional (3D) structures that emulate the development, cytoarchitecture, and function of the lung (organoids), containing epithelial and mesenchymal cell populations, and including the production of surfactant and presence of ciliated cells. The organoids can also be invested with mesoderm derivatives, differentiated from the same human pluripotent stem cells, such as alveolar macrophages and vasculature. Such lung organoids may be used to study the impact of environmental modifiers and perturbagens (toxins, microbial or viral pathogens, alterations in microbiome) or the efficacy and safety of drugs, biologics, and gene transfer. © 2020 Wiley Periodicals LLC. Basic Protocol: hESC/hiPSC dissection, definitive endoderm formation, and lung progenitor cell induction.