Renewal of squmous alveolar epithelium following injury probably occurs by division of type 2 cells with subsequent transformation to type 1 epithelium. The present morphologic and cytodynamic studies of developing rat lung provide further evidence that this mechanism reflects the normal process of cell renewal in the alveolar epithelium. From gestation days 18to 20, the epithelium was composed of glycogen-laden cuboidal cells which by day 20 contained lamellar bodies. In this period of high DNA synthesis in thelung, about 50 per cent of'H-thymidine-labeled pulmonary cells were type 2, and mitoseswere frquently seen in these cells. On day 22, when many type 1 cells were first seen, over-all labeling was much reduced and was predominate in interstitial cells; type 2 labeling fell to about 10 percent.(he labeling index of type 1 cells, about 1 per cent atthis time, did not increase subsequently and mitotic figures were not seen in this celltype. Cells intermediate in formbetween type 2 and type 1 were observed after day 21, and, postnatally, the normal mixed population of epithelium cells lined the alveoli. The findings of maximal DNAsythesis and cell division when the alveoli were lined exclusively by type 2 cells, low labeling and the absence of mitotic figures in type 1 epithelium, and the observation of intermediate cell forms provide additional evidence that the type 2 cell is the progenitorof type 1 epithelium.