In our two-step culturing system, epidermal progenitor cells derived from differentiating embryonic stem cells in vitro are plated on either a basement membrane matrix or in coculture. On plating on basement membrane, differentiation along the epidermal lineage is evident and reproducible, with several markers of epidermal differentiation observed in a pattern reminiscent of their in vivo expression. However, when epidermal progenitor cells are plated in a co-culture environment with mature epidermal cells at low density, colony formation, and differentiation along the epidermal pathway is enhanced with a high frequency of K14-positive cells. Thus, the in vitro co-culture model system described here is useful in dissecting the process of commitment and differentiation of epithelial progenitors that occurs during epidermogenesis as well as for the investigation of the molecular mechanisms underlying these processes.