The differentiation of embryonic stem (ES) cells is controlled by the regulatory factor differentiation inhibiting activity/leukemia inhibitory factor (DIA/LIF). Examination of feeder cell-mediated suppression of ES cell differentiation revealed that DIA/LIF is produced both as a diffusible protein and in an immobilized form associated with the extracellular matrix. This alternative localization arises from the expression of alternate transcripts that diverge throughout exon 1. The effect of alternate first exon usage is to change the amino terminus of the primary translation product and to direct incorporation of mature, biologically active DIA/LIF into the extracellular matrix. The production of a potent regulatory factor in both diffusible and immobilized forms may be an important element of developmental control mechanisms.