Previous studies have shown that pulmonary mesenchyme is required to maintain epithelial viability and to support branching morphogenesis and cytodifferentiation. We have examined whether pulmonary mesenchyme can be replaced by a medium containing a combination of soluble factors. Day 13-14 fetal rat distal lung epithelium was enzymatically separated from its mesenchyme, enrobed in EHS tumor matrix, and cultured for 5 d in medium containing concentrated bronchoalveolar lavage, EGF, acidic fibroblast growth factor, cholera toxin, insulin, and FBS (TGM), or in control medium containing only FBS. After 5 d in culture, marked growth and morphological changes occurred in epithelial rudiments cultured in TGM, whereas no changes were seen in controls. [3H]Thymidine incorporation and nuclear labeling indices during the last 24 h of culture confirmed that epithelial rudiments cultured in TGM had significant proliferative capacities. Evaluation of surfactant protein gene expression by Northern analysis, in situ hybridization, and immunocytochemistry demonstrated that distal lung epithelial differentiation progressed in TGM. Ultrastructural analysis demonstrated that fetal distal lung epithelium cultured in TGM contained lamellar bodies and deposited a basal lamina. These results are the first demonstration that sustained proliferation and differentiation of glandular stage distal pulmonary epithelium can proceed in the absence of mesenchyme.