Wallerian degeneration was studied in the phrenic or sciatic nerves of mice following transplantation into Millipore diffusion chambers of 0.22 micron pore size which were implanted in the peritoneal cavity and kept for up to eight weeks. This method positively eliminates the access of nonresident cells to the tissue, at the same time providing proper conditions for tissue survival. Such nerves showed no proliferation of Schwann cells and no evidence for their active role in the removal or digestion of myelin. Schwann cells rejected their sheaths and the latter persisted for weeks, leading either to sheath distension (the sheath becoming wider and thinner) or to collapse (the sheath becoming thicker, collapsing upon the empty axis cylinder). The outer envelope of Schwann cytoplasm separated into pseudopodia rich in microtubules. Sheath rejection led to a slow decay of the myelin in the absence of active phagocytosis. There was profuse fibroblastic proliferation from the epineurium and perineurium, from which cells migrated into the chambers developing fatty change. No evidence was found to link the fatty change in fibroblasts to sheath decay. Diffusion chambers of 5.0 micron pore size were invaded by leukocytes and monocytes. Nerves kept in such chambers showed active phagocytosis of myelin leading to its removal, similar to Wallerian degeneration in situ. Phagocytes were shown to attack selectively the rejected myelin sheaths, distinguishing the latter from the surviving Schwann cells, even though both structures derive from the same cell. The activity of phagocytes in digesting myelin was mediated by a signal which diminished in intensity with time; there was very little active phagocytosis of myelin in nerves that had been predegenerated in 0.22 micron pore chambers. Various modifications of the experiment, including studies with co-cultured peritoneal macrophages or bone marrow, indicate a need for additional activating factors to induce myelin phagocytosis.