The final stage of lung development, alveolarization, continues after birth in man and rodents. Clinical interventions, such as oxygen therapy in the first week of life can adversely impact alveolar formation. We compared alveolarization in the rat neonate under normal versus hyperoxic conditions, examining gelatinase, TGF-ß and the protease urokinase-type plasminogen activator (uPA) activities in whole lung and cultured AEC2. The dynamic induction of gelatinase, TGF-ß and uPA activities seen in neonatal lungs during the first days of life was significantly impacted by hyperoxia. In whole lung, gelatinase and TGF-ß activities were increased, while uPA activity was decreased. At the level of the epithelium, AEC2 isolated from hyperoxic rat pups early in life secreted less active TGF-ß, less active gelatinases and less active uPA than control neonatal AEC2. AEC2 from hyperoxic pups also expressed increased levels of PCNA early in life, compared with control neonatal AEC2, suggesting that oxygen-induced proliferation and/or repair were occurring. The developmental profile of neonatal lung was perturbed within a day of initiating oxygen treatment, suggesting that putative palliative treatments should be co-administered with oxygen therapy.