Seven-day embryos of BALB/c mice transplanted underneath the kidney capsule of adult syngeneic recipients form either benign teratomas or teratocarcinomas, which can be distinguished from one another histologically at 8 weeks post-embryonic transplantation. Embryo-derived (ED) teratomas were allowed to remain in the host for an additional period up to 1 year after embryo transplantation, to test their malignant potential. It was found that a considerable number of slow-growing small tumors derived from embryonic transplant give rise to parietal yolk-sac carcinomas. A proportion of these tumors contained foci of visceral yolk-sac and trophoblastic differentiation, which gradually disappeared in successive transplantations. We conclude that parietal yolk-sac carcinoma develops as a late event in some ED teratomas. These malignant tumors originate either from small foci of yolk sac originally included in the grafted embryo or, more likely, from the yolk sac formed from the differentiating embryonic stem cells.