The mechanism by which schradan is converted to a powerful anticholinesterase by fortified liver homogenates has been studied. A scheme is proposed involving the production from DPNH of hydrogen peroxide, which then oxidizes an unknown microsomal factor with the aid of catalase. The factor in turn oxidizes schradan. The evidence for this proposal is that all the factors involved are present in the preparations that oxidize schradan and that, in general, appropriate additions can replace the endogenous factors. However, difficulties are introduced by the very low efficiency of the over-all system.