To form a large diffusible interface capable of conducting respiratory gases to and from the circulation, the lung must undergo extensive cell proliferation, branching morphogenesis, and alveolar saccule formation, to generate sufficient surface area. In addition, the cells must differentiate into at least 40 distinct lung cell lineages. Specific transcriptional factors, peptide growth factor receptor-mediated signaling pathways, extracellular matrix components, and integrin-signaling pathways interact to direct lung morphogenesis and lung cell lineage differentiation. Branching mutants of the respiratory tracheae in Drosophila have identified several functionally conserved genes in the fibroblast growth factor signaling pathway that also regulate pulmonary organogenesis in mice and probably also in man. Key transcriptional factors including Nkx2.1, hepatocyte nuclear factor family forkhead homologues, GATA family zinc finger factors, pou and homeodomain proteins, as well as basic helix-loop-helix factors, serve as master genes to integrate the developmental genetic instruction of lung morphogenesis and cell lineage determination. Lung mesenchyme serves as a 'compleat' inducer of lung morphogenesis by secreting soluble peptide growth factors. In general, peptide growth factors signaling through cognate receptors with tyrosine kinase intracellular signaling domains such as epidermal growth factor receptor, fibroblast growth factor receptors, hepatocyte growth factor/scatter factor receptor, c-met, insulin-like growth factor receptor, and platelet-derived growth factor receptor, stimulate lung morphogenesis, while the cognate receptors with serine/threonine kinase intracellular signaling domains, such as the transforming growth factor-beta receptor family are inhibitory. The extracellular matrix also plays a key role in determining branching morphogenesis. Pulmonary neuroendocrine (PNE) cells differentiate earliest in gestation among lung epithelial cells. PNE cells are principally derived from endoderm and not neural crest. PNE cells have been proposed to function as airway chemoreceptors, while PNE cell secretory granules contain many bioactive substances such as GRP which may direct proliferation of adjacent epithelial cells. Mammalian achaete-schute homolog-1 null mutant mice do not develop PNE cells. Candidate molecular switches in the transition from a quiescent to a proliferative alveolar epithelial cell (AEC) phenotype and back again following acute hyperoxia, include autocrine peptide growth factor signaling pathways and cell cycle regulatory elements. AEC type 2 also appear capable of reversible transdifferentiation into AEC type 1 and intermediate phenotypes in response to cues from extracellular matrix and cell shape, as well as soluble factors. Evidence for expression of telomerase by alveolar epithelial stem cells, which correlates with self-renewal potential, is now beginning to emerge. Lung regeneration following lobectomy in juvenile rodents is associated with co-ordinated cell proliferation, re-expression of elastin and formation of alveoli. Retinoic acid has recently shown promise as a stimulator of alveolization in juvenile rats. Our future goal is to devise new rational and gene therapeutic strategies to stimulating lung growth and maturation, ameliorating lung injury, augmenting lung repair, and inducing lung regeneration. The ideal agent or agents would therefore mimic the instructive role of lung mesenchyme, correctly inducing the temporospatial pattern of lung cell lineages necessary to restore pulmonary gas diffusing capacity.