Although general principles have been established in the regulation of vetebrate organogenesis, the specific molecules responsible for such signaling are just being identified. We have studied differentiation in the avian iris and ciliary body which undergoes a transition from smooth to striated muscle. Using heterochronic cocultures, we have found that striated muscle differentiation in pretransition (E8) cells is induced by midtransition (E11) cells through a secreted and soluble activity. In addition, contact-mediated mechanisms among pretransition cells prevented precocious striated muscle differentiation. We have tested the role of activin and its antagonist follistatin, as candidate regulators of this muscle transition. Activin induced smooth muscle differentiation while repressing striated muscle development. Conversely, follistatin promoted the emergence of striated muscle, while inhibiting smooth muscle differentiation. Significantly, secreted follistatin activity was found to increase during the smooth-to-striated muscle transition. Moreover, the striated muscle inducing activity from midtransition iris and ciliary body cell conditioned medium was depleted with an activin-affinity column which binds follistatin. These results suggest that activin and follistatin coordinate differentiation in the avian iris and ciliary body.