During mammalian embryogenesis, epithelial-mesenchymal interactions play a determining role in normal tissue patterning and development. Keratinocyte growth factor (KGF), a member of the fibroblast growth factor (FGF) family, is a mesenchymally-derived mitogen for epithelial cells. As the KGF receptor is expressed by epithelial cells of numerous tissues and KGF is produced in adjacent stromal cells, KGF is thought to play a role in mediating epithelial cell behaviour. To further investigate the role of this molecule in the development of ocular epithelia we employed transgenic mice engineered to overexpress human KGF in the eye. The most striking phenotypic development was the hyperproliferation of embryonic corneal epithelial cells and their subsequent differentiation into functional lacrimal gland-like tissues. This indicates that stimulation of the KGF receptor early in development, in surface ectoderm normally destined to form corneal epithelium, is sufficient to alter the fate of these cells. Furthermore, this suggests that the correct spatial and temporal expression of FGFs plays a critical role in normal lacrimal gland induction. These transgenic mice provide a valuable model system to study the mechanisms underlying cell fate decisions during ocular morphogenesis.