The relationship between lung liquid flow and fetal lung development has been studied at the cellular level using ultrastructural techniques. Continuous in utero tracheal ligation and drainage (over a period of 21-28 days) both result in malformations of the developing fetal lamb lung. Ligated lungs are larger, and drained lungs are smaller, than normal lungs at a similar gestational age. These changes are not merely due to altered lung liquid volume, but actual tissue growth thas been affected. Future alveolar wall thinning is enhanced in ligated lungs and inhibited in drained lungs, whilst the presence of differentiated alveolar type II cells (probably related to surfactant production) is decreased in ligated lungs and markedly enhanced in drained lungs. These results indicate the importance of fetal lung liquid in the regulation of pulmonary development in the fetus.