Stromal–epithelial interactions play a profound role in regulating normal and tumor development in the mammary gland. The molecular details of these events, however, are incompletely understood. A novel serum-free transwell coculture system was developed to study the natural paracrine interactions between mammary epithelial cells (MEC) and mammary fibroblasts (MFC) isolated from normal rats during puberty. The MEC were cultured within a reconstituted basement membrane (RBM) in transwell inserts with or without MFC in the lower well. The presence of MFC stimulated epithelial cell growth, induced alveolar morphogenesis, and enhanced casein accumulation, a marker of the functional differentiation of MEC, but did not induce ductal morphogenesis. Potent mitogenic, morphogenic, and lactogenic effects were observed when the MFC were cultured either on plastic or within a layer of RBM. Although most MFC maintained on plastic died after 1 wk in serum-free medium, fibroblast survival was enhanced significantly when the MFC were cultured within the RBM. Taken together, this in vitro model effectively reconstitutes a physiologically relevant three-dimensional microenvironment for MEC and MFC, and seems ideal for studying the locally derived factors that regulate the developmental fate of the epithelial and fibroblast compartments of the mammary gland.