A functional thymus develops after cultured thymus tissue is transplanted into subjects with complete DiGeorge anomaly. To gain insight into how the process occurs, 7 post-transplantation thymus biopsy tissues were evaluated. In 5 of 7 biopsies, the thymus appeared to be predominantly cortex with thymocytes expressing cortical markers. Unexpectedly, the epithelium expressed both cortical [cortical dendritic reticulum antigen 2 (CDR2)] and medullary [cytokeratin (CK) 14] markers. Early medullary development was suggested by epithelial cell adhesion molecule (EpCAM) reactivity in small areas of biopsies. Two other biopsies had distinct mature cortex and medulla with normal restriction of CK14 to the medulla and subcapsular cortex, and of CDR2 to cortex. These data are consistent with a model in which thymic epithelium contains CK14+ "progenitor epithelial cells". After transplantation these cells proliferate as CK14+CDR2+ thymic epithelial cells that are associated with cortical thymocytes. Later these cells differentiate into distinct cortical and medullary epithelia.