Distal lung development occurs through coordinated induction of myofibroblasts, epithelial cells, and capillaries. Lunatic Fringe (Lfng) is a beta(1-3) N-acetylglucosamine transferase that modifies Notch receptors to facilitate their activation by Delta-like (Dll1/4) ligands. Lfng is expressed in the distal lung during saccular development, and deletion of this gene impairs myofibroblast differentiation and alveogenesis in this context. A similar defect was observed in Notch2(beta-geo/+)Notch3(beta-geo/beta-geo) compound mutant mice but not in Notch2(beta-geo/+) or Notch3(beta-geo/beta-geo) single mutants. Finally, to directly test for the role of Notch signaling in myofibroblast differentiation in vivo, we used ROSA26-rtTA(/+);tetO-CRE(/+);RBPJkappa(flox/flox) inducible mutant mice to show that disruption of canonical Notch signaling during late embryonic development prevents induction of smooth muscle actin in mesenchymal cells of the distal lung. In sum, these results demonstrate that Lfng functions to enhance Notch signaling in myofibroblast precursor cells and thereby to coordinate differentiation and mobilization of myofibroblasts required for alveolar septation.