Newborn rat testis was transplanted under the kidney capsule of adult castrated and uncastrated male rats to develop and characterize a model system for studies on Leydig cell development. Two weeks after transplantation, the number of Leydig cells and the size of their nuclei in the transplants had increased. Secretion of testosterone was indicated by increased seminal vesicle weights and decreased pituitary LH in the castrated host animals. Pituitary FSH content increased significantly in the uncastrated animals with transplants, which suggested production of an FSH-stimulating factor. Cells with the morphologic features characteristic of fetal- and adult-type Leydig cells were observed in the transplants. The seminiferous tubules with spermatocytes, incipient lumina, and significantly larger average diameters showed more advanced development than those in the normal 2-week-old testis. By the present morphologic and functional criteria, the kidney subcapsular transplantation technique provides a suitable model for studies of fetal and adult Leydig cell development.