The inactivation of the prolactin receptor gene by homologous recombination has made it possible to investigate the role of prolactin signaling in mammary gland development without resort to ablative surgery of the endocrine glands. In knockout mice lacking the prolactin receptor, mammary development is normal up to puberty. Subsequently, the ducts branch less frequently than those of wild-type animals. While terminal end buds differentiate to alveolar buds in wild-type females by the end of puberty, in knockout females terminal end bud-like structures persist at the ductal ends. To distinguish between the developmental defects that are intrinsic to the epithelium and those that result from systemic endocrine alterations in prolactin receptor knockout mice, mammary epithelium from prolactin receptor knockouts was transplanted into mammary fat pads of wild-type mice. In virgin mice, the knockout epithelial transplants developed normally at puberty, indicating an indirect effect of prolactin on ductal development. Prolactin receptor knockout females are infertile due to multiple reproductive defects, but epithelial transplants allowed us to assess the extent to which the absence of prolactin receptor is limiting, under systemic conditions that allow full mammary gland development. During pregnancy, the prolactin receptor knockout transplants showed normal side branching and the formation of alveolar buds, but no lobuloalveolar development. Thus, prolactin affects mammary morphogenesis in two different ways: it controls ductal side branching and terminal end bud regression in virgin animals via indirect mechanisms, but acts directly on the mammary epithelium to produce lobuloalveolar development during pregnancy.