The potential use of pluripotent stem cells for tissue repair or replacement is now well recognized. While the ability of embryonic stem (ES) cells to differentiate into all cells of the body is undisputed, their use is currently restricted by our limited knowledge of the mechanisms controlling their differentiation. This review discusses recent work by ourselves and others investigating the intercellular signalling events that occur within aggregates of mouse ES cells. The work illustrates that the processes of ES cell differentiation, epithelialization and programmed cell death are dependent upon their location within the aggregates and coordinated by the extracellular matrix. Establishment of the mechanisms involved in these events is not only of use for the manipulation of ES cells themselves, but it also throws light on the ways in which differentiation is coordinated during embryogenesis.