The lung bud (aka tracheal bud) evaginates from the ventral foregut endoderm.
The lung bud bifurcates (branches out) to form the two (left and right) bronchial buds.
The bronchial buds bifurcate repeatedly to form a huge surface area.
Each bronchiolus (small, individual branch) ends in an a small sac-like alveolus.
Mature alveoli are surrounded by capillaries and responsible for gas exchange.
Reciprocal signaling between the lung endoderm and surrounding mesenchyme controls the pattern of bronchial (lung) branching. Mesenchymal cells close to budding region produce Fgf10, which promotes proliferation of bronchioli. The tracheal bud does not branch in Fgf-/- mice, thus confirming that FGF induces cell proliferation. However, if FGF were the only signal then the bronchioli would continually grow without branching. Several mechanisms define branch points, one of which involves Shh.
Shh inhibits FGF expression, and is secreted from the tip of the bronchiolus when branching is about to occur. This leads to a high FGF concentration along a growing bronchiolus, but a low FGF concentration at its tip. As a result, the bronchiolus splits at the tip into two branches; each new branch grows toward the high FGF concentration. Shh-/- knockout mice have primitive sacs instead of lungs due to complete failure of branching.
Drosophila Lung Development
Drosophila has a signaling mechanism similar to the aforementioned FGF/Shh system. The Drosophila respiratory system begins as a series of invaginating placodes which later future to form multiple branches. Growth of tracheal primordia is induced by binding of its FGF receptor by an FGF homolog called branchless. The tip of the tracheal primordium expresses sprouty, which diffuses and inhibits FGF-stimulated proliferation in basal cells. This causes a T-shaped expansion of the tracheal primordium tip.