Mouse fetal liver was studied ultrastructurally to identify and charaterize the developing hepatic parenchyma or prehepatocyte which may be responsible for producing the liver hemopoietic enviroment. It was observed that as the liver develops, there is close association of endodermal and mesenchymal cells in the region of the septum transversum. Numerous intercellular adhesions were observed between endodermal cells and mesenchymal cells. Twenty-fours after endodermal and mesenchymal cells first intermingle, the liver extravascular space consisted of consisted of spherical hemopoietic cells dispersed among a heterogenous population of dark and light cells. The reticulum of prehepatocytes formed a three-demensional cellular network which structurally supported the hemopoietic cells residing in the liver. By 12 days of gestation, prehepatocytes were a homogenous population of dark, stellate cells joined together by numerous intercellular adhesions. Broad areas of intercellular association were noted between processes and prehepatocytes and hemopoietic cells; however, no inercellular junctions between these two disparate cell populations were observed at this or any stage in development. Characteristics reflecting a cell population capable of synthesis and secretion of proteinaceous substances, namely, dilated Golgi apparati, increased numbers of polyribsomes and profiles of rough endoplasmic reticulum (RER), two types of vacuoles and/or vesicles, and intercellular microvillus-lined spaces, were observed in the prehepatocytes between 12 and 17 days gestation. By day 17 of gestation, glycogen accumulation, biliary channel development, appearance of a subendothelial microvillus surface, nuclear shape and chromatin pattern, and arrangement of cytoplasmic organelles reflected the maturation of prehepatocytes into hepatocytes, the adult liver parenchyma.