A detailed model for hyposmotic fluid formation in Hydra is presented. We propose that enteron fluid formation occurs in two steps: (1) segregation of an isosmotic fluid in large intercellular vacuoles with (2) subsequent reabsorption of solute in the intercellular channels to form the hyposmotic fluid of the enteron. Intercellular spaces in Hydra have been studied by light microscopy and thin-section electron microscopy, as well as by electrophysiological methods. These spaces are of two types: (1) large vacuoles which are located in the cells of both the epidermis and gastrodermis, being more numerous in the epidermis; and (2) lateral intercellular channels which run from the intercellular vacuoles, leading eventually to the enteron. These vacuoles and channels are highly convoluted, forming a complex three-dimensional network. We suggest that the network is involved in the water balance of Hydra.