The mechanisms of action of, and resistance to, the steroidal regulators of normal mammary epithelial and breast cancer cell development are only partially understood. A major obstacle to research progress has been the difficulty in supporting physiologically relevant development of normal mammary epithelial cells (MEC) under defined serum‐free conditions. A primary culture system was developed in our laboratory that permits nonfunctional rat MEC to undergo extensive proliferation, functional differentiation, as well as multilobular and lobuloductal branching alveolar morphogenesis. In the studies reported here, the contributions of hydrocortisone and progesterone during the coordinate induction of cellular proliferation, organoid morphogenesis, and functional capacity were assessed. Hydrocortisone (0.1–10 μg/ml) induced alveolar and multilobular branching morphogenesis, suppressed lobuloductal branching morphogenesis, and enhanced casein accumulation. Hydrocortisone also played a role in maintaining alveolar as well as multilobular branching morphogenesis and casein levels. Progesterone (0.01–1 μg/ml) induced cellular proliferation as well as multilobular and lobuloductal branching morphogenesis, and suppressed casein accumulation. At a supraphysiological concentration (10 μg/ml), progesterone inhibited cell growth, alveolar branching morphogenesis, and casein accumulation. MEC cultured without progesterone for up to 1 week retained the ability to respond when subsequently exposed to this steroid. Reversibility studies suggested that progesterone was required for the induction, but not the maintenance of the mitogenic, morphogenic, and lactogenic effects. This physiologically relevant primary culture system can be used to study the factors that regulate steroid responsiveness as well as the cross‐talk between steroid and growth factor receptor signaling pathways in normal MEC and breast cancer cells. © 1995 Wiley‐Liss, Inc.