The differentiation in vitro of clonal pluripotent teratocarcinoma cells is reported. The first stage of this process is the formation of simple embryoid bodies which are identical to those found in animals bearing intraperitoneal teratocarcinomas. They consist of an inner core of embryonal carcinoma cells surrounded by a layer of endodermal cells which produce Reichert's membrane. The endodermal cells become apparent shortly after the embryonal carcinoma cells have formed aggregates which are loosely attached to the substratum. One clonal teratocarcinoma line was found to produce complex cystic embryoid bodies in vitro. Following formation of the endodermal cells, extensive differentiation to a wide variety of cell types occurs. There are similarities between the process of embryoid body formation and the early events of differentiation of the mouse embryo.