Hepatocytes differentiate from the endoderm during embryonic development. Recent studies show, however, that hepatocytes can also be derived from rare cells that reside in the pancreas, bone marrow, and brain. Indeed, the latest discoveries indicate that embryonic hepatocytes normally arise by diversion of an endodermal cell population that would otherwise default to a pancreatic fate. Convergent FGF and BMP signals from distinct mesodermal cell types control this transition. Molecular signals that govern the differentiation of hepatocytes from non-endodermal cells and the role of such cells in normal liver physiology remain to be discovered.