We examined the ultrastructural features of postnatal alveolar septal formation in rats from birth to 28 days of age. At birth, the rat lung consists of large saccules with thick walls and cellular interstitium. Interstitial cells have large oval nuclei with scant cytoplasm containing few organelles and scattered lipid droplets. These cells appear to be poorly differentiated mesenchymal cells not engaged in active protein synthesis or secretion. Between 5 and 15 days of age, saccule walls thin and many new alveolar septa form. Two types of interstitial fibroblasts are present: one which appears at the tips of newly formed septa has the characteristics of a myofibroblast and appears to be engaged in synthesis and secretion of elastin; the other fibroblast appears at the base of new septa, is filled with lipid and contains few other cytoplasmic organelles. After 15 days of age, alveolar walls become thinner, few new septa form and interstitial fibroblasts begin to resemble the dormant type of fibroblasts seen at birth. Thus, the process of postnatal alveolarization of lung parenchyma involves differentiation of the interstitial fibroblast and elastogenesis. The factors which control this process, the precise role of elastogenesis in alveolar septal formation, the origin and fate of the lipid filled fibroblast and the ultimate fate of the myofibroblast remain to be determined.