This chapter presents evidence that the external world is involved in a wide range of linguistic processes, from parsing syntax to encoding facts and understanding figurative phrases. Embedded language processing involves complex situational variables imposing immediate influences on word recognition, syntactic parsing, and discourse comprehension. Language processes rely heavily on situational variables at a very fine time scale, and therefore exhibit the kind of interaction-dominant dynamics that are more consistent with the developing situated cognition approach to psychology than with the traditional information-processing approach. Speech input alone does not determine spoken-word recognition. The situational context, constrained by what relevant objects are visible and actionable, plays an immediate role in driving the processes that map phonemes onto lexical representations and lexical representations onto referential operations. In many circumstances, the proper analysis of language processing is at the level of the organisms and the environment in which they are situated.