This report describes a novel in vivo model of intestinal differentiation. Fourteen day, undifferentiated fetal rat small intestine, stripped of the major part of its mesenchyme, suspended in a type I collagen gel and then xenografted into a nude mouse, undergoes small intestinal morphogenesis and cytodifferentiation. All four major epithelial lineages, namely Paneth, goblet, columnar and endocrine are present. Double-label nonisotopic in situ hybridization, employing biotinylated and digoxigenin-labelled whole rat DNA and whole mouse DNA probes, was performed to distinguish donor cells from host cell types. The outer longitudinal smooth muscle layer, and the major part of the lamina propria, including pericryptal fibroblasts, are of host mouse origin; the inner circular smooth muscle layer is of donor rat origin. Cells of the muscularis propria and lamina propria acquired smooth muscle alpha-actin, presumably under the influence of the donor endoderm. Furthermore, this xenograft develops a host vascular network, and cells with the morphological appearance of lymphocytes are present within the intestinal epithelium. The production of chemotactic factors by the endoderm is postulated because grafting of collagen gel alone results in a minimal invasion by stromal cells which do not express smooth muscle alpha-actin.