Liver differentiation results from cellular interactions between the mesoderm and the endoderm. The presumptive hepatic endoderm is determined to differentiate into parenchymal cells from the 4-5 somite stage under the influence of the precardiac mesoderm. Later on, the endodermal cells proliferate and give rise to the hepatic buds from which strands of glandular cells are derived. The mesenchymal liver component stimulates both proliferation and differentiation of the endodermal cells. Its action is, however, not specific since the same effect is obtained with all the mesenchymes derived from the lateral plate mesoderm. The characteristics of the mesenchymal liver component were studied. In both quail and chick a cholinesterase activity was detected in the mesenchymal liver cells, which show an extensive development of the granular ergastoplasmic reticulum and of the Golgi apparatus. A close contact between endodermal and mesenchymal cells seems to be required for the cell interactions to occur. In monolayer cultures, glycogen synthesis ceases in the hepatocytes which after some days become fibroblastic in appearance. However, such a dedifferentiation is not irreversible. If reassociated with hepatic mesenchyme the fibroplastic cultures can recover their ability to synthesize and store glycogen.