Lung morphogenesis relies on a number of important processes, including proximal-distal patterning, cell proliferation, migration and differentiation, as well as epithelial-mesenchymal interactions. In mouse lung development, SOX2 cells are localized in the proximal epithelium, whereas SOX9 cells are present in the distal epithelium. We show that, in human lung, expression of these transcription factors differs, in that during the pseudoglandular stage distal epithelial progenitors at the tips coexpress SOX2 and SOX9. This double-positive population was no longer present by the canalicular stages of development. As in mouse, the human proximal epithelial progenitors express solely SOX2 and are surrounded by smooth muscle cells (SMCs) both in the proximal airways and at the epithelial clefts. Upon Ras-related C3 botulinum toxin substrate 1 inhibition, we noted decreased branching, as well as increased SMC differentiation, attenuated peristalsis, and a reduction in the distal double-positive SOX2/SOX9 progenitor cell population. Thus, the presence of SOX2/SOX9 double-positive progenitor cells in the distal epithelium during the pseudoglandular stage of human lung development appears to be critical to proximal-distal patterning and lung branching. Moreover, SMCs promote a SOX2 proximal phenotype and seem to suppress the SOX9 population.