Bladder smooth muscle differentiation is dependent on the presence of bladder epithelium. Previously, we have shown that direct contact between the epithelium and bladder mesenchyme (BLM) is necessary for this interaction. In this study, we tested the hypothesis that bladder smooth muscle can be induced via diffusable growth factors. Fourteen-day embryonic rat bladders were separated into bladder mesenchyme (prior to smooth muscle differentiation) and epithelium by enzymatic digestion and microdissection. Six in vitro experiments were performed with either direct cellular contact or no contact (1) 14-d embryonic bladder mesenchyme (BLM) alone (control), (Contact) (2) 14-d embryonic bladders intact (control), (3) 14-d embryonic bladder mesenchyme combined with BPH-1 cells (an epithelial prostate cell line) in direct contact, (4) 14-d embryonic bladder mesenchyme with recombined bladder epithelium (BLE) in direct contact, (No Contact) (5) 14-d embryonic bladder mesenchyme with BPH-1 prostatic epithelial cells cocultured in type 1 collagen gel on the bottom of the well, and (6) 14-d embryonic bladder mesenchyme with BPH-1 epithelium cultured in a monolayer on a transwell filter. In each case the bladder tissue was cultured on Millicell-^®CM 0.4-μm membranes for 7 d in plastic wells using serum free medium. Growth was assessed by observing the size of the bladder organoids in histologic cross section as well as the vertical height obtained in vitro. Immunohistochemical analysis of the tissue explants was performed to assess cellular differentiation with markers for smooth muscle α-actin and pancytokeratin to detect epithelial cells. Control (1) bladder mesenchyme grown alone did not exhibit growth or smooth muscle and epithelial differentiation. Contact experiments (2) intact embryonic bladder, (3) embryonic bladder mesenchyme recombined with BPH-1 cells, and (4) embryonic bladder mesenchyme recombined with urothelium each exhibited excellent growth and bladder smooth muscle and epithelial differentiation. Both noncontact experiments (5) and (6) exhibited growth as well as bladder smooth muscle and epithelial differentiation but to a subjectively lesser degree than the contact experiments. Direct contact of the epithelium with bladder mesenchyme provides the optimal environment for growth and smooth muscle differentiation. Smooth muscle growth and differentiation can also occur without direct cell to cell contact and is not specific to urothelium. This data supports the hypothesis that epithelium produces diffusable growth factors that induce bladder smooth muscle.