This paper details some of the interstitial events associated with the formation of alveoli during early postnatal life and the physiological consequences of alterations in this process. Formation of alveoli coincides with differentiation of dormant interstitial fibroblasts into myofibroblasts within new alveolar buds and lipid-filled fibroblasts at the base of these buds. The myofibroblasts appear to be involved in synthesis and secretion of elastin and perhaps other connective tissue elements. Glycosaminoglycans identified with ruthenium red or tannic acid appear in the extracellular matrix of the buds. The role of the lipid-filled fibroblast is uncertain. Since lung size increases at a greater rate than airway size during the early postnatal period, conditions that stimulate or depress postnatal lung alveolarization influence relative airflow rates. Highland natives have larger than normal lungs and low relative maximal expiratory airflow. Hamsters whose growth has been blunted by protein malnutrition have small lungs but large relative maximal expiratory airflow. These results illustrate the physiological importance of dysanaptic lung growth.