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Although histologic definition of follicular thyroid lesions is readily available, application of the diagnostic criteria and personal experience may lead to disagreement among pathologists. To investigate interobserver variation in assessment of encapsulated follicular lesions, eight pathologists (four American and four Japanese) reviewed the same hematoxylin and eosin-stained slide of each of 21 cases of thyroid lesions showing encapsulation and follicular growth pattern. In 10% of the cases, there was complete agreement. At least seven pathologists agreed on the diagnosis in 29% of the cases, and at least six in 76% of the cases. American and Japanese pathologists agreed among themselves in 33% and 52% of cases, respectively. The frequency of diagnosis of adenomatous goiter among Japanese pathologists (31%) was considerably higher than that among American pathologists (6%). In contrast, the frequency of diagnosis (25%) of papillary carcinoma among American pathologists was considerably higher than that (4%) among Japanese pathologists. Our analysis revealed three main factors affecting observer variation: 1) interpretation of the significance of microfollicles intimately related to capillaries within the tumor capsule, 2) evaluation of what constituted the type of nuclear clearing indicative of papillary carcinoma, and 3) absence of clear morphologic criteria for separation of adenomatous goiter and follicular adenoma. To reduce observer variation of encapsulated follicular lesions, it will be necessary to provide more explicit criteria for diagnosis.