Neovascularization is crucial to lung morphogenesis; however, factors determining vessel growth and formation are poorly understood. The goal of our study was to develop an allograft model that would include maturation of the distal lung, thereby ultimately allowing us to study alveolar development, including microvascular formation. We transplanted 14-day gestational age embryonic mouse lung primordia subcutaneously into the back of nude mice for 3.5-14 days. Lung morphogenesis and neovascularization were evaluated by light microscopy, in situ hybridization, and immunohistochemical techniques. Embryonic 14-day gestational age control lungs had immature structural features consistent with pseudoglandular stage of lung development. In contrast, 14 days after subcutaneous transplantation of a 14-day gestational age lung, the allograft underwent significant structural morphogenesis and neovascularization. This was demonstrated by continued neovascularization and cellular differentiation, resulting in mature alveoli similar to those noted in the 2-day postnatal neonatal lung. Confirmation of maturation of the allograft was provided by progressive type II epithelial cell differentiation as evidenced by enhanced local expression of mRNA for surfactant protein C and a threefold (P < 0.008) increase in vessel formation as determined by immunocytochemical detection of platelet endothelial cell adhesion molecule-1 expression. Using the tyrosine kinase Flk-1 receptor (flk-1) LacZ transgene embryos, we determined that the neovascularization within the allograft was from the committed embryonic lung endothelium. Therefore, we have developed a defined murine allograft model that can be used to study distal lung development, including neovascularization. The model may be useful when used in conjunction with an altered genetic background (knockout or knock in) of the allograft and has the further decided advantage of bypassing placental barriers for introduction of pharmacological agents or DNA directly into the lung itself.