Liver diseases are associated with a marked reduction in the viable mass of hepatocytes. The most severe cases of liver disease (liver failure) are treated by orthotopic liver transplantation. One alternative to whole organ transplantation for patients with hepatic failure (and hereditary liver disease) is hepatocyte transplantation. However, there is a serious limitation to the treatment of liver diseases either by whole organ or hepatocyte transplantation, and that is the shortage of organ donors. Therefore, to overcome the problem of organ shortage, additional sources of hepatocytes must be found. Alternative sources of cells for transplantation have been proposed including embryonic stem cells, immortalised liver cells and differentiated cells. One other source of cells for transplantation found in the adult liver is the progeny of stem cells. These cells are termed hepatic progenitor cells (HPCs). The therapeutic potential of HPCs lies in their ability to proliferate and differentiate into hepatocytes and cholangiocytes. However, using HPCs as a cell therapy cannot be exploited fully until the mechanisms governing hepatocyte differentiation are elucidated. Here, we discuss the fundamental cellular and molecular elements required for HPC differentiation to hepatocytes.