Normal lung morphogenesis and cytodifferentiation require interactions between epithelium and mesenchyme. We have previously shown that distal lung mesenchyme (LgM) is capable of reprogramming tracheal epithelium (TrE) from day 13–14 rat fetuses to branch in a lung‐like pattern and express a distal lung epithelial phenotype. In the present study, we have assessed the effects of tracheal mesenchyme (TrM) on branching and cytodifferentiation of distal lung epithelium (LgE). Tracheae and distal lung tips from day 13 rat fetuses were separated into purified epithelial and mesenchymal components, then recombined as homotypic (LgM + LgE or TrM + TrE) or heterotypic (LgM + TrE or TrM + LgE) recombinants and cultured for 5 days; unseparated lung tips and tracheae served as controls. Control lung tips, LgM + LgE, and LgM + TrE recombinants all branched in an identical pattern. Epithelial cells, including those from the induced TrE, contained abundant glycogen deposits and lamellar bodies, and expressed surfactant protein C (SP‐C) mRNA. Trachea controls, and both TrM + TrE, and TrM + LgE recombinants did not branch, but instead formed cysts. The epithelium contained ciliated and mucous secretory cells; importantly, no cells containing lamellar bodies were observed, nor was SP‐C mRNA detected. Mucin immunostaining showed copious production of mucous in both LgE and TrE when recombined with TrM. These results demonstrate that epithelial differentiation in the recombinants appears to be wholly dependent on the type of mesenchyme used, and that the entire respiratory epithelium has significant plasticity in eventual phenotype at this stage in development. Dev. Dyn. 1998;212:482–494. © 1998 Wiley‐Liss, Inc.