Transdifferentiation (or sometimes it is referred to as metaplasia) is defined as the conversion of one cell type to another. Cells which undergo transdifferentiation generally arise from adjacent regions of the developing embryo. For example, liver and pancreas arise from the same region of the endoderm. Understanding transdifferentiation is important to developmental biologists because it will help elucidate the cellular and molecular differences that distinguish neighbouring regions of the embryo. To address this issue, we have developed models for the conversion of pancreatic cells and hepatocytes. Addition of the synthetic glucocorticoid dexamethasone is sufficient to induce a hepatic phenotype in pancreatic cells (the rat pancreatic cell line AR42J-B13, embryonic mouse pancreas and human foetal pancreatic cells). The hepatocytes induced by transdifferentiation express a mature liver phenotype and are able to perform at least some of the functions of bone fide hepatocytes. We have determined the molecular basis of the switch from pancreatic to the hepatic phenotype and found that the transcription factor CCAAT enhancer binding protein beta (C/EBPbeta) is able to induce a hepatic phenotype when overexpressed in pancreatic cells. Expression analysis of members of the C/EBP family demonstrates liver but not pancreas expression during embryonic development. C/EBPs may therefore distinguish pancreas and liver tissues during embryonic development.