Development of multicellular organisms is orchestrated by persistent cell–cell communication between neighboring partners. Direct interaction between different cell types can induce molecular signals that dictate lineage specification and cell fate decisions. Current single-cell RNA-seq technology cannot adequately analyze cell–cell contact-dependent gene expression, mainly due to the loss of spatial information. To overcome this obstacle and resolve cell–cell contact-specific gene expression during embryogenesis, we performed RNA sequencing of physically interacting cells (PIC-seq) and assessed them alongside similar single-cell transcriptomes derived from developing mouse embryos between embryonic day (E) 7.5 and E9.5. Analysis of the PIC-seq data identified gene expression signatures that were dependent on the presence of specific neighboring cell types. Our computational predictions, validated experimentally, demonstrated that neural progenitor (NP) cells upregulate Lhx5 and Nkx2-1 genes, when exclusively interacting with definitive endoderm (DE) cells. Moreover, there was a reciprocal impact on the transcriptome of DE cells, as they tend to upregulate Rax and Gsc when in contact with NP cells. Using individual cell transcriptome data, we formulated a means of computationally predicting the impact of one cell type on the transcriptome of its neighboring cell types. We have further developed a distinctive spatial-t-distributed stochastic neighboring embedding to display the pseudospatial distribution of cells in a 2-dimensional space. In summary, we describe an innovative approach to study contact-specific gene regulation during embryogenesis.