Differentiation of murine embryonic stem cells in suspension culture results in the formation of cystic embryoid bodies that develop blood islands. In this study pre-cystic embryoid bodies were attached to a substratum, and the program of differentiation was monitored. The attached ES cell cultures formed blood islands on a cell layer that migrated out from the center of attachment and beneath a mesothelial-like cell layer. Morphological and in situ marker analysis showed benzidine-positive hematopoietic cells surrounded by vascular endothelial cells that expressed PECAM and took up DiI-Ac-LDL. Waves of morphological differentiation were evident, suggesting a graded response to differentiation signals. Electron microscopy of the blood islands showed that they were similar to blood islands of cystic embryoid bodies and mouse yolk sacs, and cell-cell junctions were evident among the blood island cells. RNA expression analysis was consistent with the presence of hematopoietic precursor cells of several lineages and a primitive vascular endothelium in the cultures. Thus a program of vascular and hematopoietic development can be elaborated in attached ES cell cultures, and these blood islands are accessible to experimental manipulation.