Alveolar development in humans primarily occurs postnatally and requires a carefully orchestrated expansion of distal epithelial and mesenchymal progenitor populations and coordinated differentiation, to create a highly segmented gas-exchange surface. The regulation of alveolarization normally assimilates cues from paracrine cell-cell, cell-extracellular matrix, and mechanical interactions which are superimposed on cells and the extracellular matrix through phasic respiratory movement. In bronchopulmonary dysplasia, the entire process is precociously initiated when cellular and extracellular components are adapted to the saccular stage where movement and circulation are much more limited. This review focuses on mesenchymal cells (fibroblasts, endothelial cells, and pericytes), and epithelial cells are primarily discussed as sources of growth factor ligands or recipients of ligands produced by mesenchymal cells. Some interstitial fibroblasts differentiate to contractile myofibroblasts, containing a smooth muscle-actin rich cytoskeleton, which connects with tensile and elastic elements in the extracellular matrix, and together comprise a load-bearing network that diffuses mechanical forces during respiration. Other interstitial fibroblasts assimilate neutral lipid droplets, which regulate the differentiation of distal epithelial progenitors and surfactant production by alveolar type 2 cells. Pericytes organize and reinforce the capillary network as it expands to match the coverage of type 1 epithelial cells. Hyperoxia and the mechanical load imposed by positive pressure mechanical ventilation disrupt these paracrine interactions, leaving thickened alveolar walls, airways and arterioles, thereby diminishing gas-exchange surface area. Better understanding of these mechanisms of alveolar septation will lead to more effective treatments to preserve and perhaps augment the surface usual sequence of events that drive alveolarization.