A dual target magnetron sputtering system was used to synthesize nanocomposite films with VO2 nanocrystals embedded in Al2O3 matrix. Glancing incidence X-ray diffraction and high-resolution transmission electron microscopy reveal the formation of VO2 narrocrystallites with monoclinic structure. X-ray photoemission analysis confirmed that oxide particles predominantly possess VO2 stoichiometry. Valence band spectra acquired below and above transition temperature demonstrate that embedded VO2 particles exhibit a first-order monoclinic-to-tetragonal phase transition, however the band shape in a metallic state exhibits feature that is not characteristic for bulk material. (C) 2008 Elsevier B.V. All rights reserved.