Embryonic mouse tracheal epithelium, which branches in an epithelial–mesenchymal recombination culture with bronchial mesenchyme, was cultured under mesenchyme‐free conditions. When embedded in a basement‐membrane–like matrix and cultured in a serum‐free medium supplemented with fibroblast growth factor 1 (FGF1), the tracheal epithelium did not branch, whereas the bronchial epithelium underwent branching morphogenesis. When the medium was enriched with transferrin (Tf), bud formation was induced in the tracheal epithelium and some buds branched secondarily. FGF7 and FGF10, in cooperation with Tf, induced tracheal bud formation to the same extent as FGF1, although the optimum concentrations differed. A bromodeoxyuridine‐labeling study comparing cultures with and without Tf showed no Tf‐specific amplification of cell proliferation. A whole‐mount in situ hybridization study of the expression of Bmp4 and Shh genes in explants of mesenchyme‐free culture revealed that both genes were ubiquitously expressed and that expression did not correlate with bud formation. This expression pattern was different from the distally localized expression pattern observed in normal lung rudiments and in extratracheal buds induced by the recombined bronchial mesenchyme. These results suggest that both bronchial and tracheal bud formations were initiated without localized exposure of the epithelium to FGFs and were not accompanied by localized expression of Bmp4 and Shh in the epithelium. © 2001 Wiley‐Liss, Inc.