At birth, the distal lung epithelium undergoes a profound phenotypic switch from secretion to absorption in the course of adaptation to air breathing. In this review, we describe the developmental regulation of key membrane transport proteins and the way in which epinephrine, oxygen, glucocorticoids, and thyroid hormones interact to bring about this crucial change in function. Evidence from molecular, transgenic, cell culture, and whole lung studies is presented, and the clinical consequences of the failure of the physiological mechanisms that underlie perinatal lung liquid absorption are discussed.