The formation of epithelial tubes with defined shapes and sizes is essential for organ development. We describe a unique tracheal tubulogenesis phenotype caused by loss of both Drosophila type III receptor tyrosine phosphatases (RPTPs), Ptp4E and Ptp10D. Ptp4E is the only widely expressed Drosophila RPTP, and is the last of the six fly RPTPs to be genetically characterized. We recently isolated mutations in Ptp4E, and discovered that, although Ptp4E null mutants have no detectable phenotypes, double mutants lacking both Ptp4E and Ptp10D display synthetic lethality at hatching owing to respiratory failure. In these double mutants, unicellular and terminal tracheal branches develop large bubble-like cysts that selectively incorporate apical cell surface markers. Cysts in unicellular branches are enlargements of the lumen that are sealed by adherens junctions, whereas cysts in terminal branches are cytoplasmic vacuoles. Cyst size and number are increased by tracheal expression of activated Egfr tyrosine kinase, and decreased by reducing Egfr levels. Ptp10D forms a complex with Egfr in transfected cells. Downregulation of Egfr signaling by the RPTPs is required for the construction of tubular lumens, whether extracellular or intracellular, by cells that undergo remodeling during branch morphogenesis. The Ptp4E Ptp10D phenotype represents the first evidence of an essential role for RPTPs in epithelial organ development. These findings might be relevant to organ development and disease in mammals, because PTPRJ (DEP-1), an ortholog of Ptp4E/Ptp10D, interacts with the hepatocyte growth factor receptor tyrosine kinase. PTPRJ corresponds to the murine Scc1 (suppressor of colon cancer) gene.