Many studies have suggested that transforming growth factor beta (TGF-beta) and bone morphogenetic protein 4 (Bmp4) regulate early development of the lung. In this study, administration of growth factors directly into the lumen of lungs grown in organ culture was used to limit their activity to the epithelium and test the hypothesis that signaling to the epithelium is sufficient to mediate the known effects of TGF-beta and BMP-4 on early lung development. Addition of TGF-beta1, beta2, or beta3 to the medium surrounding lungs grown in organ culture resulted in decreased branching, reduced cell proliferation, accumulation of alpha-smooth muscle actin protein (alpha-SMA) in the mesenchyme, and decreased expression of a marker for respiratory epithelium, surfactant protein-C (Sp-C). When TGF-beta1 was restricted to the epithelium, accumulation of alpha-SMA and inhibition of Sp-C expression were not observed but branching and proliferation were inhibited. In contrast, branching was not inhibited in lungs where TGF-beta2 or TGF-beta3 were restricted to the epithelium suggesting differences in the mechanism of signaling by TGF-beta1, TGF-beta2 or TGF -beta3 in lung. Addition of Bmp4 to the medium surrounding lungs grown in organ culture stimulated cell proliferation and branching morphogenesis; however, direct injection of Bmp4 into the lung lumen had no effect on proliferation or branching. Based on these data and data from mesenchyme-free cultures, we propose that the mesenchyme influences growth factor signaling in the lung.