Transdifferentiation is the name used to describe the direct conversion of one differentiated cell type into another. Cells which have the potential to interconvert by transdifferentiation generally arise from adjacent regions in the developing embryo. For example, the liver and pancreas arise from the same region of the endoderm. The transdifferentiation of pancreas to liver (and vice versa) has been observed in animal experiments and in certain human pathologies. Understanding transdifferentiation is important to developmental biologists because it will help elucidate the cellular and molecular differences that distinguish neighbouring regions of the embryo. While the in vivo models for the transdifferentiation of liver to pancreas have been valuable, it is more difficult to extrapolate from these studies to individual changes at the cellular or molecular levels. The recent development of two in vitro systems (AR42J cells and embryonic pancreatic cultures) for the transdifferentiation of pancreas to liver has shown that an environmental change in the form of an exogenous glucocorticoid can cause the conversion of pancreatic exocrine cells into hepatocytes. The AR42J cell system has been used to elucidate the cell lineage and the molecular basis of transdifferentiation of pancreas to liver.