Branching morphogenesis of the lung and differentiation of specialized cell populations is dependent upon reciprocal interactions between epithelial cells derived from endoderm of embryonic foregut and surrounding mesenchymal cells. These interactions are mediated by elaboration and concerted actions of a variety of growth and differentiation factors binding to specific receptors. Such factors include members of the fibroblast growth factor family, sonic hedgehog, members of the transforming growth factor-β family, epidermal growth factor, and members of the platelet-derived growth factor family. Hormones that increase cyclic AMP formation, glucocorticoids, and retinoids also play important roles in branching morphogenesis, alveolar development, and cellular differentiation. Expression of the genes encoding these morphogens and their receptors is controlled by a variety of transcription factors that also are highly regulated. Several of these transcription factors serve dual roles as regulators of genes involved in early lung development and in specialized functions of differentiated cells. Targeted null mutations of genes encoding many of these morphogens and transcription factors have provided important insight into their function during lung development. In this chapter, the cellular and molecular mechanisms that control lung development are considered, as well as those that regulate expression of the genes encoding the surfactant proteins.