Developing a physiologically relevant in vitro model of the respiratory epithelium is critical for understanding lung development and respiratory diseases. Here, we describe a detailed protocol in which the fetal mouse proximal epithelial progenitors were differentiated into 3D airway organoids, which contain terminal-differentiated ciliated cells and basal stem cells. These differentiated airway organoids could constitute an excellent experimental model to elucidate the molecular mechanisms of airway development and epithelial cell fate determination and offer an important tool for establishing pulmonary dysplasia disease in vitro.