OBJECTIVE: To investigate the effect of pet ownership and exposure to indoor allergens on lung function in 3-year-old children. DESIGN: Birth cohort study. SETTING: Community. PARTICIPANTS: Children recruited prenatally and followed prospectively to age 3 years. MAIN OUTCOME MEASURES: Specific airway resistance (sRaw) (measured with body plethysmograph) at age 3 years; skin-prick tests; data on cat and dog ownership collected prospectively; allergen levels measured in dust collected from homes (high exposure defined as mite allergens >2 microg/g in mattress, and dog >10 microg/g and cat >8 microg/g allergens on the living room floor). RESULTS: There was no effect of cat or dog ownership at birth or age 3 years on lung function, and no association between lung function and mite, dog, or cat allergen exposure. Sensitized children exposed to high levels of sensitizing allergen had significantly poorer lung function (n = 49, sRaw kiloPascal per second [kPa/s]; geometric mean [GM], 1.20; 95% confidence interval [CI], 1.13-1.28) than children who were not sensitized and not exposed (n = 114; GM, 1.08; 95% CI, 1.04-1.12); not sensitized, but exposed (n = 282; GM, 1.07; 95% CI, 1.05-1.10); or sensitized and not exposed (n = 53; GM, 1.12; 95% CI, 1.06-1.18; P = .005). In a multivariate model, independent significant associates of lung function were maternal and paternal asthma, and the combination of sensitization and exposure to sensitizing allergen, with significant interaction between them. Lung function was substantially worse in sensitized and highly exposed children with both asthmatic parents (GM, 2.23; 95% CI, 1.68-2.97), compared with those with neither (GM, 1.09; 95% CI, 1.04-1.16) or just 1 of these features. CONCLUSIONS: Pet ownership, sensitization without exposure, or exposure in nonsensitized individuals have no effect on lung function. However, the combination of specific sensitization and exposure to sensitizing allergen is associated with significantly poorer lung function in early life.