Lung diseases constitute a major global burden of health and are characterized by inflammation and chronic fibrosis resulting in a loss of gas exchange units. To date there has been no effective treatment to reverse these chronic inflammatory changes and tissue remodelling. Recently, stem cells have been shown to successfully treat animal models of lung disease. In addition, certain cells have demonstrated a capacity to differentiate into lung cells. Based on these preliminary data, there are clinical trials underway to examine the potential for cellular therapies in lung disease. Recently, there have been a variety of cell examined for both their immunomodulatory effects on the lung as well as their potential for differentiation into lung cells. These range from lung progenitor cells, circulating cells, mesenchymal stem cells (MSCs), induced pluripotent stem cells (iPS), placental stem cells and embryonic stem cells (ESCs). Several cell types demonstrate immunomodulatory effects including circulating cells, MSCs and placental stem cells. In addition, iPS, placental cells and ESCs have shown some capacity for differentiation. Despite these major steps forward cellular therapy for lung diseases still faces challenges. Issues that need to be resolved include bioethical issues, the safety of cell transplantation, ideal routes of delivery, the timing and the specific indications that would make cellular therapy effective.