Basic research on embryonic lung development offers unique opportunities to make important discoveries that will impact human health. Developmental biologists interested in the molecular control of branching morphogenesis have intensively studied the developing lung, with its complex and seemingly stereotyped ramified structure. However, it is also an organ that is linked to a vast array of clinical problems in humans such as bronchopulmonary dysplasia in premature babies and emphysema, chronic obstructive pulmonary disease, fibrosis, and cancer in adults. Epithelial stem/progenitor cells reside in niches where they interact with specific extracellular matrices as well as with mesenchymal cells; the latter are still poorly characterized. Interactions of epithelial stem/progenitor cells with their microenvironments are usually instructive, controlling quiescence versus activation, proliferation, differentiation, and migration. During the past 18 years, Fgf10 has emerged not only as a marker for the distal lung mesenchyme during early lung development, but also as a key player in branching morphogenesis and a critical component of the niche for epithelial stem cells. In this paper, we will present the current knowledge regarding the lineage tree in the lung, with special emphasis on cell-lineage decisions in the lung mesenchyme and the role of Fgf10 in this context.