Lung development differs in the embryo and fetus with regard to branching pattern and organization of the epithelial cells. The surrounding mesodermal component, the capsule, has long been known to play a role in branching. As a result of recent analyses of distribution of components of the extracellular matrix coupled with interference with their expression, we are beginning to understand how branching is controlled. Insoluble macromolecules of the basal lamina and deeper extracellular matrix may act as physical barriers or traps to sequester soluble components. The soluble growth factors activate genes regulating cell proliferation.