Sixteen children with refractory diarrhea and three malnourished children who had frequent episodes of acute gastroenteritis but little diarrhea at the time of hospital admission, were studied by peroral upper small intestinal biopsy. Six children were adequately nourished; five children weighed 62 to 79% of expected weight and eight weighed less than 60% of expected weight. Two of the malnourished children had giardiasis. Pathogenic bacteria were found in only one case. Varying degrees of mucosal atrophy with reduction of mean villous height were seen in 18 cases. The concentration of mononuclear inflammatory cells and plasma cells was about half that seen in well-nourished children with severe nongastrointestinal infections. The concentration of mononuclear cells in the lamina propria was about twice that seen in normal adults. The proportions of IgA-producing cells and cells that stained for secretory component were significantly reduced, as compared with normal adult control values. This reduction was most striking in children with malnutrition complicated by giardiasis. Enzyme histochemical studies were performed for leucine aminopeptidase, alkaline phosphatase and acid phosphatase. There was a tendency for considerably reduced acid phosphatase activity in all clinical groups (kwashiorkor, marasmic kwashiorkor and marasmus) of growth-retarded infants.