The appearance of hepatic foci in the pancreas has been described in animal experiments and in human pathology. Here we show that pancreatic cells can be converted into hepatocytes by treatment with a synthetic glucocorticoid, dexamethasone. This occurs both in a pancreatic cell line, AR42J-B13, and in organ cultures of pancreatic buds from mouse embryos. We have established several features of the mechanism behind this transdifferentiation. We show that a proportion of the hepatocytes arises directly from differentiated exocrine-like cells, with no intervening cell division. This conversion is associated with induction of the transcription factor C/EBPbeta and the activation of differentiated hepatic products. Transfection of C/EBPbeta into the cells can provoke transdifferentiation; conversely, a dominant-negative form of C/EBPbeta can inhibit the process. These results indicate that C/EBPbeta is a key component that distinguishes the liver and pancreatic programmes of differentiation.