During terminal differentiation, epithelia become columnar and develop specialized apical membrane structures (microvilli) and functions (regulated endocytosis and exocytosis). Using a clonal intercalated epithelial cell line, we found that high seeding density induced these characteristics, whereas low density seeding maintained a protoepithelial state. When cells were plated at low density, but on the extracellular matrix of high density cells, they converted to the more differentiated phenotype. The extracellular matrix (ECM) protein responsible for this activity was purified and found to be a large 230-kD protein, which we termed hensin. High density seeding caused hensin to be polymerized and deposited in the extracellular matrix, and only this form of hensin was able to induce terminal differentiation. Antibodies to hensin blocked the change in phenotype. However, its purification to homogeneity resulted in loss of activity, suggesting that an additional protein might be necessary for induction of terminal differentiation. Here, we found that a 29-kD protein specifically associates with hensin in the ECM. Addition of purified p29 restored the activity of homogenously purified hensin. Mass fingerprinting identified p29 as galectin 3. Purified recombinant galectin 3 was able to bind to hensin and to polymerize it in vitro. Seeding cells at high density induced secretion of galectin 3 into the ECM where it bundled hensin. Hence, the high density state causes a secretion of a protein that acts on another ECM protein to allow the new complex to signal the cell to change its phenotype. This is a new mechanism of inside-out signaling.