This protocol describes a co-culture system for the in vitro differentiation of mouse embryonic stem cells into hepatocyte-like cells. Differentiation involves four steps: (i) formation of embryoid bodies (EB), (ii) induction of definitive endoderm from 2-d-old EBs, (iii) induction of hepatic progenitor cells and (iv) maturation into hepatocyte-like cells. Differentiation is completed by 16 d of culture. EBs are formed, and cells can be induced to differentiate into definitive endoderm by culture in Activin A and fibroblast growth factor 2 (FGF-2). Hepatic differentiation and maturation of cells is accomplished by withdrawal of Activin A and FGF-2 and by exposure to liver nonparenchymal cell-derived growth factors, a deleted variant of hepatocyte growth factor (dHGF) and dexamethasone. Approximately 70% of differentiated embryonic stem (ES) cells express albumin and can be recovered by albumin promoter-based cell sorting. The sorted cells produce albumin in culture and metabolize ammonia, lidocaine and diazepam at approximately two-thirds the rate of primary mouse hepatocytes.