We have previously shown that fetal lung mesenchyme can reprogram embryonic rat tracheal epithelium to express a distal lung phenotype. We have also demonstrated that embryonic rat lung epithelium can be induced to proliferate and differentiate in the absence of lung mesenchyme. In the present study we used a complex growth medium to induce proliferation and distal lung epithelial differentiation in embryonic tracheal epithelium. Day-13 embryonic rat tracheal epithelium was separated from its mesenchyme, enrobed in growth factor-reduced Matrigel, and cultured for up to 7 days in medium containing charcoal-stripped serum, insulin, epidermal growth factor, hepatocyte growth factor, cholera toxin, fibroblast growth factor 1 (FGF1), and keratinocyte growth factor (FGF7). The tracheal epithelial cells proliferated extensively in this medium, forming lobulated structures within the extracellular matrix. Many of the cells differentiated to express a type II epithelial cell phenotype, as evidenced by expression of SP-C and osmiophilic lamellar bodies. Deletion studies showed that serum, insulin, cholera toxin, and FGF7 were necessary for maximum growth. While no single deletion abrogated expression of SP-C, deleting both FGF7 and FGF1 inhibited growth and prevented SP-C expression. FGF7 or FGF1 as single additions to the medium, however, were unable to induce SP-C expression, which required the additional presence of serum or cholera toxin. FGF10, which binds the same receptor as FGF7, did not support transdifferentiation when used in place of FGF7. These data indicate that FGF7 is necessary, but not sufficient by itself, to induce the distal rat lung epithelial phenotype, and that FGF7 and FGF10 play distinct roles in lung development.