The formation and maturation of the outer epithelial layer is essential for maximal alphafetoprotein (AFP) production during differentiation of F9 embryoid bodies in the presence of 5 X 10(-8) M retinoic acid (Grover et al., 1983. J. Cell Biol. 96:1690-1696). The critical phase is between the third and the fourth day when the components of the extracellular matrix organize into a basement membrane. The role of some of these components in the process of epithelium formation and maturation is analyzed in this paper. The role of laminin was investigated by testing the effect of exogenous laminin and antilaminin in cultures of differentiating F9 aggregates. Tests included growth rates, morphological changes, AFP production, determination of AFP mRNA levels, and fluorescent staining for basement membrane components and for epithelial markers. At concentrations greater than 5 micrograms/ml, exogenous laminin inhibited the production of AFP and prevented AFP gene transcription. On the basis of immunofluorescence tests, exogenous laminin appeared to act by preventing the accumulation of a basement membrane and by disrupting the organization of the outer layer into an epithelium. No such effects were produced by fibronectin or collagens type I or IV. Aggregates cultured in the presence of antilaminin also failed to organize an epithelium and did not produce AFP, whereas those in normal rabbit serum differentiated normally. Therefore, endogenous laminin plays a key role not only as a basement membrane structural component but also in organizing the epithelial layer of endoderm cells and hence (indirectly) in gene expression.