Lung development is the result of complex interactions between four tissues: epithelium, mesenchyme, mesothelium and endothelium. We marked the lineages experiencing Notch1 activation in these four cellular compartments during lung development and complemented this analysis by comparing the cell fate choices made in the absence of RBPjkappa, the essential DNA binding partner of all Notch receptors. In the mesenchyme, RBPjkappa was required for the recruitment and specification of arterial vascular smooth muscle cells (vSMC) and for regulating mesothelial epithelial-mesenchymal transition (EMT), but no adverse affects were observed in mice lacking mesenchymal RBPjkappa. We provide indirect evidence that this is due to vSMC rescue by endothelial-mesenchymal transition (EnMT). In the epithelium, we show that Notch1 activation was most probably induced by Foxj1-expressing cells, which suggests that Notch1-mediated lateral inhibition regulates the selection of Clara cells at the expense of ciliated cells. Unexpectedly, and in contrast to Pofut1-null epithelium, Hes1 expression was only marginally reduced in RBPjkappa-null epithelium, with a corresponding minimal effect on pulmonary neuroendocrine cell fate selection. Collectively, the primary roles for canonical Notch signaling in lung development are in selection of Clara cell fate and in vSMC recruitment. These analyses suggest that the impact of gamma-secretase inhibitors on branching in vitro reflect a non-cell autonomous contribution from endothelial or vSMC-derived signals.