The formation of the primitive endoderm layer on the surface of the inner cell mass is one of the earliest epithelial morphogenesis in mammalian embryos. In mouse embryos deficient of Disabled-2 (Dab2), the primitive endoderm cells lose the ability to position on the surface, resulting in defective morphogenesis. Embryonic stem cells lacking Dab2 are also unable to position on the surface of cell aggregates and fail to form a primitive endoderm outer layer in the embryoid bodies. The cellular function of Dab2, a cargo-selective adaptor, in mediating endocytic trafficking of clathrin-coated vesicles is well established. We show here that Dab2 mediates directional trafficking and polarized distribution of cell surface proteins such as megalin and E-cadherin and propose that loss of polarity is the underlying mechanism for the loss of epithelial cell surface positioning in Dab2-deficient embryos and embryoid bodies. Thus, the findings indicate that Dab2 is a surface positioning gene and suggest a novel mechanism of epithelial cell surface targeting.