In this paper we report that suspensions of human fetal thymocytes contain cells that express high levels of CD34 and Thy-1. These cells were characterized with regard to location within the thymus, phenotype, and function. Confocal laser scan analysis of frozen sections of fetal thymus with anti-CD34 and Thy-1 antibodies revealed that the double-labeled cells were located in the pericortical area. In addition, it was found that the CD34+Thy-1+ cells lacked CD45 and CD50, indicating that these cells are not of hematopoietic origin; this was confirmed by the finding that these cells could be cultured as adherent cells in a medium with cholera toxin and dexamethasone, but failed to grow in mixtures of hematopoietic growth factors. Further analysis indicated that most cultured CD34+Thy-1+ cells expressed cytokeratin (CK) 14 but lacked CK 13, suggesting that these cells are immature epithelial cells. Cultured CD34+Thy-1+ cells were able to induce differentiation of CD1-CD34+CD3-CD4-CD8- thymic precursors into CD4+CD8+ cells in a reaggregate culture in the absence of exogenous cytokines. The CD4+CD8+ cells that developed in these cultures did not express CD3, indicating that CD34+Thy-1+ thymic stromal cells are not capable of completing full T cell differentiation of thymic hematopoietic progenitor cells.