Developmental changes in lung morphology and physiology during postnatal alveolarization were assessed in transgenic mice expressing transforming growth factor-alpha (TGF-alpha) in pulmonary type II cells under control of the surfactant protein C gene promoter. TGF-alpha transcripts were identified in respiratory epithelial cells at 1 day of age to adulthood. Enlargement of alveolar airspaces and fibrosis were detected as early as 1 week of age, and the increased airspace progressed with advancing age. Specific lung compliance was significantly increased in lungs of transgenic mice by 2 weeks of age and was associated with airflow obstruction. Chronic expression of TGF-alpha in the lungs of newborn transgenic mice caused remodeling of the developing lung during the period of postnatal alveolarization, resulting in markedly enlarged parenchymal airspace, pulmonary fibrosis, and physiological abnormalities including airway obstruction and increased lung compliance.