We have used human hepatoma cell lines as an in vitro model to study the development of hepatic bile canaliculi (BC). Well-differentiated hepatoma cells cultured for 72 hours could develop characteristic spheroid structures at sites of cell-cell contact that contained tight junctions and various membrane protein markers, resembling BC found in vivo. Intact cytoskeleton was essential for this differentiation process. In the coculture experiments in which cells of different origins were populated together, BC only formed between hepatic cells and preferentially among well-differentiated cells. Poorly differentiated hepatoma cells never formed BC among themselves, but could be induced to undergo canalicular differentiation by interacting with well-differentiated cells. During BC morphogenesis, integral canalicular membrane proteins were gradually delivered and accumulated at the developing BC. Among them, targeting of aminopeptidase N (APN) seemed to correlate with activation of certain secretory functions. Specifically, only APN-positive BC supported excretion of fluorescein diacetate (FDA) and 70-kd dextran, but had no relationship with secretion of horseradish peroxidase (HRP). Targeting of another BC protein, dipeptidyl peptidase IV (DPPIV), on the other hand, bore no association with any secretory activity examined. In addition, inhibition of enzymatic activity of APN could perturb canalicular differentiation without affecting cell proliferation. Our results suggest that targeting of APN proteins may reflect or even play an important role in the development and functional maturation of the canalicular structures.