The lungs are a pair of spongy organs, located on either side of the chest.
The trachea (windpipe) transports air, that has been inhaled through the mouth or nose, to the lungs. This act of inhalation, or breathing, is known as ventilation - the movement of air between your surroundings, and your lungs.
From the trachea, the air way must split (to service each lung), the branch like tubes that conduct the air from the trachea to the lungs are called bronchi. As we get further and further into the lungs, the bronchi split into finer and smaller branches called bronchioles. At the ends of the bronchioles are clusters of microscopic air sacs. These are called alveoli.
It is at these alveoli that the gas transfer, or diffusion, takes place. Oxygen from the air is absorbed into the blood, whereas carbon dioxide (a waste product) can be expelled from the bloodstream.
The oxygenated blood flows through microscopic capillaries to your (larger) veins, and eventually your heart. From here it can be distributed around the whole body.