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The lacrimal gland provides an excellent model with which to study the epithelial-mesenchymal interactions that are crucial to the process of branching morphogenesis. In the current study, we show that bone morphogenetic protein 7 (Bmp7) is expressed with a complex pattern in the developing gland and has an important role in regulating branching. In loss-of-function analyses, we find that Bmp7-null mice have distinctive reductions in lacrimal gland branch number, and that inhibition of Bmp activity in gland explant cultures has a very similar consequence. Consistent with this, exposure of whole-gland explants to recombinant Bmp7 results in increased branch number. In determining which cells of the gland respond directly to Bmp7, we have tested isolated mesenchyme and epithelium. We find that, as expected, Bmp4 can suppress bud extension in isolated epithelium stimulated by Fgf10, but interestingly, Bmp7 has no discernible effect. Bmp7 does, however, stimulate a distinct response in mesenchymal cells. This manifests as a promotion of cell division and formation of aggregates, and upregulation of cadherin adhesion molecules, the junctional protein connexin 43 and of α-smooth muscle actin. These data suggest that in this branching system, mesenchyme is the primary target of Bmp7 and that formation of mesenchymal condensations characteristic of signaling centers may be enhanced by Bmp7. Based on the activity of Bmp7 in promoting branching, we also propose a model suggesting that a discrete region of Bmp7-expressing head mesenchyme may be crucial in determining the location of the exorbital lobe of the gland. [ABSTRACT FROM AUTHOR]