diff --git a/src/demo-app/chips/chips-demo.html b/src/demo-app/chips/chips-demo.html
index 5100ef5f31fc..d3ba62b3824f 100644
--- a/src/demo-app/chips/chips-demo.html
+++ b/src/demo-app/chips/chips-demo.html
@@ -1,68 +1,65 @@
 <div class="chips-demo">
-  <section>
-    <h3>Static Chips</h3>
-
-    <h5>Simple</h5>
-
-    <md-chip-list>
-      <md-chip>Chip 1</md-chip>
-      <md-chip>Chip 2</md-chip>
-      <md-chip>Chip 3</md-chip>
-    </md-chip-list>
-
-    <h5>Advanced</h5>
-
-    <md-chip-list>
-      <md-chip class="md-accent selected">Selected/Colored</md-chip>
-      <md-chip class="md-warn" *ngIf="visible"
-               (destroy)="alert('chip destroyed')" (click)="toggleVisible()">
-        With Events
-      </md-chip>
-    </md-chip-list>
-
-    <h5>Unstyled</h5>
-
-    <md-chip-list>
-      <md-basic-chip>Basic Chip 1</md-basic-chip>
-      <md-basic-chip>Basic Chip 2</md-basic-chip>
-      <md-basic-chip>Basic Chip 3</md-basic-chip>
-    </md-chip-list>
-
-    <h3>Material Contributors</h3>
-
-    <md-chip-list>
-      <md-chip *ngFor="let person of people; let even = even" [ngClass]="[color, even ? 'selected' : '' ]">
-        {{person.name}}
-      </md-chip>
-    </md-chip-list>
-
-    <br />
-
-    <md-input #input (keyup.enter)="add(input)" (blur)="add(input)" placeholder="New Contributor...">
-    </md-input>
-
-    <h3>Stacked Chips</h3>
-
-    <p>
-      You can also stack the chips if you want them on top of each other.
-    </p>
-
-    <md-chip-list class="md-chip-list-stacked">
-      <md-chip (focus)="color = ''" class="selected">
-        None
-      </md-chip>
-
-      <md-chip (focus)="color = 'md-primary'" class="selected md-primary">
-        Primary
-      </md-chip>
-
-      <md-chip (focus)="color = 'md-accent'" class="selected md-accent">
-        Accent
-      </md-chip>
-
-      <md-chip (focus)="color = 'md-warn'" class="selected md-warn">
-        Warn
-      </md-chip>
-    </md-chip-list>
-  </section>
+  <md-card>
+    <md-toolbar color="primary">Static Chips</md-toolbar>
+
+    <md-card-content>
+      <h4>Simple</h4>
+
+      <md-chip-list>
+        <md-chip>Chip 1</md-chip>
+        <md-chip>Chip 2</md-chip>
+        <md-chip>Chip 3</md-chip>
+      </md-chip-list>
+
+      <h4>Unstyled</h4>
+
+      <md-chip-list>
+        <md-basic-chip>Basic Chip 1</md-basic-chip>
+        <md-basic-chip>Basic Chip 2</md-basic-chip>
+        <md-basic-chip>Basic Chip 3</md-basic-chip>
+      </md-chip-list>
+
+      <h4>Advanced</h4>
+
+      <md-chip-list selectable="false">
+        <md-chip color="accent" selected="true">Selected/Colored</md-chip>
+        <md-chip color="warn" selected="true" *ngIf="visible"
+                 (destroy)="alert('chip destroyed')" (click)="toggleVisible()">
+          With Events
+        </md-chip>
+      </md-chip-list>
+    </md-card-content>
+  </md-card>
+
+  <md-card>
+    <md-toolbar color="primary">Dynamic Chips</md-toolbar>
+
+    <md-card-content>
+      <h4>Input Container</h4>
+
+      <md-chip-list>
+        <md-chip *ngFor="let person of people" [color]="color">
+          {{person.name}}
+        </md-chip>
+      </md-chip-list>
+
+      <md-input-container>
+        <input md-input #input (keyup.enter)="add(input)" placeholder="New Contributor..."/>
+      </md-input-container>
+
+      <h4>Stacked Chips</h4>
+
+      <p>
+        You can also stack the chips if you want them on top of each other and/or use the
+        <code>(focus)</code> event to run custom code.
+      </p>
+
+      <md-chip-list class="md-chip-list-stacked">
+        <md-chip *ngFor="let aColor of availableColors"
+                 (focus)="color = aColor.color" color="{{aColor.color}}" selected="true">
+          {{aColor.name}}
+        </md-chip>
+      </md-chip-list>
+    </md-card-content>
+  </md-card>
 </div>
\ No newline at end of file
diff --git a/src/demo-app/chips/chips-demo.scss b/src/demo-app/chips/chips-demo.scss
index 46e1d249941e..f0ba734b465f 100644
--- a/src/demo-app/chips/chips-demo.scss
+++ b/src/demo-app/chips/chips-demo.scss
@@ -4,6 +4,19 @@
     max-width: 200px;
   }
 
+  md-card {
+    padding: 0;
+    margin: 16px;
+
+    & md-toolbar {
+      margin: 0;
+    }
+
+    & md-card-content {
+      padding: 24px;
+    }
+  }
+
   md-basic-chip {
     margin: auto 10px;
   }
diff --git a/src/demo-app/chips/chips-demo.ts b/src/demo-app/chips/chips-demo.ts
index 45ac721ff490..16135f235cf0 100644
--- a/src/demo-app/chips/chips-demo.ts
+++ b/src/demo-app/chips/chips-demo.ts
@@ -5,6 +5,11 @@ export interface Person {
   name: string;
 }
 
+export interface DemoColor {
+  name: string;
+  color: string;
+}
+
 @Component({
   moduleId: module.id,
   selector: 'chips-demo',
@@ -24,6 +29,13 @@ export class ChipsDemo {
     { name: 'Paul' }
   ];
 
+  availableColors: DemoColor[] = [
+    { name: 'none', color: '' },
+    { name: 'Primary', color: 'primary' },
+    { name: 'Accent', color: 'accent' },
+    { name: 'Warn', color: 'warn' }
+  ];
+
   alert(message: string): void {
     alert(message);
   }
diff --git a/src/lib/chips/_chips-theme.scss b/src/lib/chips/_chips-theme.scss
index 9fa1b60b2240..3dd5dccfc8e2 100644
--- a/src/lib/chips/_chips-theme.scss
+++ b/src/lib/chips/_chips-theme.scss
@@ -1,3 +1,4 @@
+@import '../core/theming/palette';
 @import '../core/theming/theming';
 
 @mixin md-chips-theme($theme) {
@@ -6,27 +7,40 @@
   $accent: map-get($theme, accent);
   $warn: map-get($theme, warn);
   $background: map-get($theme, background);
+  $foreground: map-get($theme, foreground);
+
+  // Use spec-recommended color for regular foreground, and utilise contrast color for a grey very
+  // close to the selected spec since no guidance is provided and to ensure palette consistency.
+  $light-foreground: rgba(0, 0, 0, 0.87);
+  $light-selected-foreground: md-contrast($md-grey, 600);
+
+  // The spec only provides guidance for light-themed chips. When inside of a dark theme, fall back
+  // to standard background and foreground colors.
+  $unselected-background: if($is-dark-theme, md-color($background, card), #e0e0e0);
+  $unselected-foreground: if($is-dark-theme, md-color($foreground, text), $light-foreground);
+
+  $selected-background: if($is-dark-theme, md-color($background, app-bar), #808080);
+  $selected-foreground: if($is-dark-theme, md-color($foreground, text), $light-selected-foreground);
 
   .md-chip {
-    background-color: #e0e0e0;
-    color: rgba(0, 0, 0, 0.87);
+    background-color: $unselected-background;
+    color: $unselected-foreground;
   }
 
-  .md-chip.selected {
-    // There is no dark theme in the current spec, so this applies to both
-    background-color: #808080;
-
-    // Use a contrast color for a grey very close to the background color
-    color: md-contrast($md-grey, 600);
+  .md-chip.md-chip-selected {
+    background-color: $selected-background;
+    color: $selected-foreground;
 
     &.md-primary {
       background-color: md-color($primary, 500);
       color: md-contrast($primary, 500);
     }
+
     &.md-accent {
       background-color: md-color($accent, 500);
       color: md-contrast($accent, 500);
     }
+
     &.md-warn {
       background-color: md-color($warn, 500);
       color: md-contrast($warn, 500);
diff --git a/src/lib/chips/chip-list.spec.ts b/src/lib/chips/chip-list.spec.ts
index 01daa7be7bd9..3552f90996f6 100644
--- a/src/lib/chips/chip-list.spec.ts
+++ b/src/lib/chips/chip-list.spec.ts
@@ -3,6 +3,8 @@ import {Component, DebugElement, QueryList} from '@angular/core';
 import {By} from '@angular/platform-browser';
 import {MdChip, MdChipList, MdChipsModule} from './index';
 import {ListKeyManager} from '../core/a11y/list-key-manager';
+import {FakeEvent} from '../core/a11y/list-key-manager.spec';
+import {SPACE} from '../core/keyboard/keycodes';
 
 describe('MdChipList', () => {
   let fixture: ComponentFixture<any>;
@@ -10,7 +12,7 @@ describe('MdChipList', () => {
   let chipListNativeElement: HTMLElement;
   let chipListInstance: MdChipList;
   let testComponent: StaticChipList;
-  let items: QueryList<MdChip>;
+  let chips: QueryList<MdChip>;
   let manager: ListKeyManager;
 
   beforeEach(async(() => {
@@ -22,9 +24,7 @@ describe('MdChipList', () => {
     });
 
     TestBed.compileComponents();
-  }));
 
-  beforeEach(() => {
     fixture = TestBed.createComponent(StaticChipList);
     fixture.detectChanges();
 
@@ -32,7 +32,8 @@ describe('MdChipList', () => {
     chipListNativeElement = chipListDebugElement.nativeElement;
     chipListInstance = chipListDebugElement.componentInstance;
     testComponent = fixture.debugElement.componentInstance;
-  });
+    chips = chipListInstance.chips;
+  }));
 
   describe('basic behaviors', () => {
     it('adds the `md-chip-list` class', () => {
@@ -42,12 +43,20 @@ describe('MdChipList', () => {
 
   describe('focus behaviors', () => {
     beforeEach(() => {
-      items = chipListInstance.chips;
       manager = chipListInstance._keyManager;
     });
 
+    it('focuses the first chip on focus', () => {
+      let FOCUS_EVENT: Event = {} as Event;
+
+      chipListInstance.focus(FOCUS_EVENT);
+      fixture.detectChanges();
+
+      expect(manager.focusedItemIndex).toBe(0);
+    });
+
     it('watches for chip focus', () => {
-      let array = items.toArray();
+      let array = chips.toArray();
       let lastIndex = array.length - 1;
       let lastItem = array[lastIndex];
 
@@ -59,7 +68,7 @@ describe('MdChipList', () => {
 
     describe('on chip destroy', () => {
       it('focuses the next item', () => {
-        let array = items.toArray();
+        let array = chips.toArray();
         let midItem = array[2];
 
         // Focus the middle item
@@ -74,7 +83,7 @@ describe('MdChipList', () => {
       });
 
       it('focuses the previous item', () => {
-        let array = items.toArray();
+        let array = chips.toArray();
         let lastIndex = array.length - 1;
         let lastItem = array[lastIndex];
 
@@ -91,20 +100,89 @@ describe('MdChipList', () => {
     });
   });
 
+  describe('keyboard behavior', () => {
+
+    describe('when selectable is true', () => {
+      beforeEach(() => {
+        testComponent.selectable = true;
+        fixture.detectChanges();
+      });
+
+      it('SPACE selects/deselects the currently focused chip', () => {
+        let FOCUS_EVENT: Event = {} as Event;
+        let SPACE_EVENT: KeyboardEvent = new FakeEvent(SPACE) as KeyboardEvent;
+        let firstChip: MdChip = chips.toArray()[0];
+
+        spyOn(testComponent, 'chipSelect');
+        spyOn(testComponent, 'chipDeselect');
+
+        // Make sure we have the first chip focused
+        chipListInstance.focus(FOCUS_EVENT);
+
+        // Use the spacebar to select the chip
+        chipListInstance._keydown(SPACE_EVENT);
+        fixture.detectChanges();
+
+        expect(firstChip.selected).toBeTruthy();
+        expect(testComponent.chipSelect).toHaveBeenCalledTimes(1);
+        expect(testComponent.chipSelect).toHaveBeenCalledWith(0);
+
+        // Use the spacebar to deselect the chip
+        chipListInstance._keydown(SPACE_EVENT);
+        fixture.detectChanges();
+
+        expect(firstChip.selected).toBeFalsy();
+        expect(testComponent.chipDeselect).toHaveBeenCalledTimes(1);
+        expect(testComponent.chipDeselect).toHaveBeenCalledWith(0);
+      });
+    });
+
+    describe('when selectable is false', () => {
+      beforeEach(() => {
+        testComponent.selectable = false;
+        fixture.detectChanges();
+      });
+
+      it('SPACE ignores selection', () => {
+        let FOCUS_EVENT: Event = {} as Event;
+        let SPACE_EVENT: KeyboardEvent = new FakeEvent(SPACE) as KeyboardEvent;
+        let firstChip: MdChip = chips.toArray()[0];
+
+        spyOn(testComponent, 'chipSelect');
+
+        // Make sure we have the first chip focused
+        chipListInstance.focus(FOCUS_EVENT);
+
+        // Use the spacebar to attempt to select the chip
+        chipListInstance._keydown(SPACE_EVENT);
+        fixture.detectChanges();
+
+        expect(firstChip.selected).toBeFalsy();
+        expect(testComponent.chipSelect).not.toHaveBeenCalled();
+      });
+    });
+
+  });
+
 });
 
 @Component({
   template: `
-    <md-chip-list>
-      <div *ngIf="remove != 0"><md-chip>{{name}} 1</md-chip></div>
-      <div *ngIf="remove != 1"><md-chip>{{name}} 2</md-chip></div>
-      <div *ngIf="remove != 2"><md-chip>{{name}} 3</md-chip></div>
-      <div *ngIf="remove != 3"><md-chip>{{name}} 4</md-chip></div>
-      <div *ngIf="remove != 4"><md-chip>{{name}} 5</md-chip></div>
-    </md-chip-list>
-  `
+    <md-chip-list [selectable]="selectable">
+      <div *ngFor="let i of [0,1,2,3,4]">
+       <div *ngIf="remove != i">
+          <md-chip (select)="chipSelect(i)" (deselect)="chipDeselect(i)">
+            {{name}} {{i + 1}}
+          </md-chip>
+        </div>
+      </div>
+    </md-chip-list>`
 })
 class StaticChipList {
-  name: 'Test';
+  name: string = 'Test';
+  selectable: boolean = true;
   remove: Number;
+
+  chipSelect(index: Number) {}
+  chipDeselect(index: Number) {}
 }
diff --git a/src/lib/chips/chip-list.ts b/src/lib/chips/chip-list.ts
index aebd396ac829..a37f8aab3b2b 100644
--- a/src/lib/chips/chip-list.ts
+++ b/src/lib/chips/chip-list.ts
@@ -4,6 +4,7 @@ import {
   Component,
   ContentChildren,
   ElementRef,
+  Input,
   ModuleWithProviders,
   NgModule,
   QueryList,
@@ -12,6 +13,8 @@ import {
 
 import {MdChip} from './chip';
 import {ListKeyManager} from '../core/a11y/list-key-manager';
+import {coerceBooleanProperty} from '../core/coercion/boolean-property';
+import {SPACE} from '../core/keyboard/keycodes';
 
 /**
  * A material design chips component (named ChipList for it's similarity to the List component).
@@ -34,8 +37,8 @@ import {ListKeyManager} from '../core/a11y/list-key-manager';
     'class': 'md-chip-list',
 
     // Events
-    '(focus)': '_keyManager.focusFirstItem()',
-    '(keydown)': 'keydown($event)'
+    '(focus)': 'focus($event)',
+    '(keydown)': '_keydown($event)'
   },
   queries: {
     chips: new ContentChildren(MdChip)
@@ -49,29 +52,85 @@ export class MdChipList implements AfterContentInit {
   /** Track which chips we're listening to for focus/destruction. */
   private _subscribed: WeakMap<MdChip, boolean> = new WeakMap();
 
+  /** Whether or not the chip is selectable. */
+  protected _selectable: boolean = true;
+
   /** The ListKeyManager which handles focus. */
   _keyManager: ListKeyManager;
 
   /** The chip components contained within this chip list. */
   chips: QueryList<MdChip>;
 
-  constructor(private _elementRef: ElementRef) {}
+  constructor(private _elementRef: ElementRef) {
+  }
 
   ngAfterContentInit(): void {
     this._keyManager = new ListKeyManager(this.chips).withFocusWrap();
 
     // Go ahead and subscribe all of the initial chips
-    this.subscribeChips(this.chips);
+    this._subscribeChips(this.chips);
 
     // When the list changes, re-subscribe
     this.chips.changes.subscribe((chips: QueryList<MdChip>) => {
-      this.subscribeChips(chips);
+      this._subscribeChips(chips);
     });
   }
 
+  /**
+   * Whether or not this chip is selectable. When a chip is not selectable,
+   * it's selected state is always ignored.
+   */
+  @Input() get selectable(): boolean {
+    return this._selectable;
+  }
+
+  set selectable(value: boolean) {
+    this._selectable = coerceBooleanProperty(value);
+  }
+
+  /**
+   * Programmatically focus the chip list. This in turn focuses the first non-disabled chip in this
+   * chip list.
+   *
+   * TODO: ARIA says this should focus the first `selected` chip.
+   */
+  focus(event: Event) {
+    this._keyManager.focusFirstItem();
+  }
+
   /** Pass relevant key presses to our key manager. */
-  keydown(event: KeyboardEvent) {
-    this._keyManager.onKeydown(event);
+  _keydown(event: KeyboardEvent) {
+    switch (event.keyCode) {
+      case SPACE:
+        // If we are selectable, toggle the focused chip
+        if (this.selectable) {
+          this._toggleSelectOnFocusedChip();
+        }
+
+        // Always prevent space from scrolling the page since the list has focus
+        event.preventDefault();
+        break;
+      default:
+        this._keyManager.onKeydown(event);
+    }
+  }
+
+  /** Toggles the selected state of the currently focused chip. */
+  protected _toggleSelectOnFocusedChip(): void {
+    // Allow disabling of chip selection
+    if (!this.selectable) {
+      return;
+    }
+
+    let focusedIndex = this._keyManager.focusedItemIndex;
+
+    if (this._isValidIndex(focusedIndex)) {
+      let focusedChip: MdChip = this.chips.toArray()[focusedIndex];
+
+      if (focusedChip) {
+        focusedChip.toggleSelected();
+      }
+    }
   }
 
   /**
@@ -80,8 +139,8 @@ export class MdChipList implements AfterContentInit {
    *
    * @param chips The list of chips to be subscribed.
    */
-  protected subscribeChips(chips: QueryList<MdChip>): void {
-    chips.forEach(chip => this.addChip(chip));
+  protected _subscribeChips(chips: QueryList<MdChip>): void {
+    chips.forEach(chip => this._addChip(chip));
   }
 
   /**
@@ -92,7 +151,7 @@ export class MdChipList implements AfterContentInit {
    * @param chip The chip to be subscribed (or checked for existing
    * subscription).
    */
-  protected addChip(chip: MdChip) {
+  protected _addChip(chip: MdChip) {
     // If we've already been subscribed to a parent, do nothing
     if (this._subscribed.has(chip)) {
       return;
@@ -102,7 +161,7 @@ export class MdChipList implements AfterContentInit {
     chip.onFocus.subscribe(() => {
       let chipIndex: number = this.chips.toArray().indexOf(chip);
 
-      if (this.isValidIndex(chipIndex)) {
+      if (this._isValidIndex(chipIndex)) {
         this._keyManager.updateFocusedItemIndex(chipIndex);
       }
     });
@@ -111,7 +170,7 @@ export class MdChipList implements AfterContentInit {
     chip.destroy.subscribe(() => {
       let chipIndex: number = this.chips.toArray().indexOf(chip);
 
-      if (this.isValidIndex(chipIndex)) {
+      if (this._isValidIndex(chipIndex)) {
         // Check whether the chip is the last item
         if (chipIndex < this.chips.length - 1) {
           this._keyManager.setFocus(chipIndex);
@@ -133,7 +192,7 @@ export class MdChipList implements AfterContentInit {
    * @param index The index to be checked.
    * @returns {boolean} True if the index is valid for our list of chips.
    */
-  private isValidIndex(index: number): boolean {
+  private _isValidIndex(index: number): boolean {
     return index >= 0 && index < this.chips.length;
   }
 
diff --git a/src/lib/chips/chip.spec.ts b/src/lib/chips/chip.spec.ts
index 0b623e3bb3ce..9797909d7c65 100644
--- a/src/lib/chips/chip.spec.ts
+++ b/src/lib/chips/chip.spec.ts
@@ -1,7 +1,7 @@
 import {async, ComponentFixture, TestBed} from '@angular/core/testing';
 import {Component, DebugElement}  from '@angular/core';
 import {By} from '@angular/platform-browser';
-import {MdChipList, MdChip, MdChipsModule} from './index';
+import {MdChipList, MdChip, MdChipEvent, MdChipsModule} from './index';
 
 describe('Chips', () => {
   let fixture: ComponentFixture<any>;
@@ -86,6 +86,28 @@ describe('Chips', () => {
 
         expect(testComponent.chipDestroy).toHaveBeenCalledTimes(1);
       });
+
+      it('allows color customization', () => {
+        expect(chipNativeElement.classList).toContain('md-primary');
+
+        testComponent.color = 'warn';
+        fixture.detectChanges();
+
+        expect(chipNativeElement.classList).not.toContain('md-primary');
+        expect(chipNativeElement.classList).toContain('md-warn');
+      });
+
+      it('allows selection', () => {
+        spyOn(testComponent, 'chipSelect');
+        expect(chipNativeElement.classList).not.toContain('md-chip-selected');
+
+        testComponent.selected = true;
+        fixture.detectChanges();
+
+        expect(chipNativeElement.classList).toContain('md-chip-selected');
+        expect(testComponent.chipSelect).toHaveBeenCalledWith({ chip: chipInstance });
+      });
+
     });
   });
 });
@@ -94,20 +116,30 @@ describe('Chips', () => {
   template: `
     <md-chip-list>
       <div *ngIf="shouldShow">
-        <md-chip (focus)="chipFocus($event)" (destroy)="chipDestroy($event)">
+        <md-chip [color]="color" [selected]="selected"
+                 (focus)="chipFocus($event)" (destroy)="chipDestroy($event)"
+                 (select)="chipSelect($event)" (deselect)="chipDeselect($event)">
           {{name}}
         </md-chip>
       </div>
     </md-chip-list>`
 })
 class SingleChip {
-  name: String = 'Test';
-  shouldShow: Boolean = true;
+  name: string = 'Test';
+  color: string = 'primary';
+  selected: boolean = false;
+  shouldShow: boolean = true;
+
+  chipFocus(event: MdChipEvent) {
+  }
+
+  chipDestroy(event: MdChipEvent) {
+  }
 
-  chipFocus() {
+  chipSelect(event: MdChipEvent) {
   }
 
-  chipDestroy() {
+  chipDeselect(event: MdChipEvent) {
   }
 }
 
diff --git a/src/lib/chips/chip.ts b/src/lib/chips/chip.ts
index 81cd0f48914d..823ce71fcdbf 100644
--- a/src/lib/chips/chip.ts
+++ b/src/lib/chips/chip.ts
@@ -17,7 +17,7 @@ export interface MdChipEvent {
 }
 
 /**
- * A material design styled Chip component. Used inside the ChipList component.
+ * A material design styled Chip component. Used inside the MdChipList component.
  */
 @Component({
   selector: 'md-basic-chip, [md-basic-chip], md-chip, [md-chip]',
@@ -26,6 +26,7 @@ export interface MdChipEvent {
     'tabindex': '-1',
     'role': 'option',
 
+    '[class.md-chip-selected]': 'selected',
     '[attr.disabled]': 'disabled',
     '[attr.aria-disabled]': '_isAriaDisabled',
 
@@ -34,31 +35,37 @@ export interface MdChipEvent {
 })
 export class MdChip implements MdFocusable, OnInit, OnDestroy {
 
-  /* Whether or not the chip is disabled. */
+  /** Whether or not the chip is disabled. Disabled chips cannot be focused. */
   protected _disabled: boolean = null;
 
-  /**
-   * Emitted when the chip is focused.
-   */
+  /** Whether or not the chip is selected. */
+  protected _selected: boolean = false;
+
+  /** The palette color of selected chips. */
+  protected _color: string = 'primary';
+
+  /** Emitted when the chip is focused. */
   onFocus = new EventEmitter<MdChipEvent>();
 
-  /**
-   * Emitted when the chip is destroyed.
-   */
+  /** Emitted when the chip is selected. */
+  @Output() select = new EventEmitter<MdChipEvent>();
+
+  /** Emitted when the chip is deselected. */
+  @Output() deselect = new EventEmitter<MdChipEvent>();
+
+  /** Emitted when the chip is destroyed. */
   @Output() destroy = new EventEmitter<MdChipEvent>();
 
-  constructor(protected _renderer: Renderer, protected _elementRef: ElementRef) {}
+  constructor(protected _renderer: Renderer, protected _elementRef: ElementRef) {
+  }
 
   ngOnInit(): void {
-    let el: HTMLElement = this._elementRef.nativeElement;
-
-    if (el.nodeName.toLowerCase() == 'md-chip' || el.hasAttribute('md-chip')) {
-      el.classList.add('md-chip');
-    }
+    this._addDefaultCSSClass();
+    this._updateColor(this._color);
   }
 
   ngOnDestroy(): void {
-    this.destroy.emit({ chip: this });
+    this.destroy.emit({chip: this});
   }
 
   /** Whether or not the chip is disabled. */
@@ -76,10 +83,40 @@ export class MdChip implements MdFocusable, OnInit, OnDestroy {
     return String(coerceBooleanProperty(this.disabled));
   }
 
+  /** Whether or not this chip is selected. */
+  @Input() get selected(): boolean {
+    return this._selected;
+  }
+
+  set selected(value: boolean) {
+    this._selected = coerceBooleanProperty(value);
+
+    if (this._selected) {
+      this.select.emit({chip: this});
+    } else {
+      this.deselect.emit({chip: this});
+    }
+  }
+
+  /** Toggles the current selected state of this chip. */
+  toggleSelected(): boolean {
+    this.selected = !this.selected;
+    return this.selected;
+  }
+
+  /** The color of the chip. Can be `primary`, `accent`, or `warn`. */
+  @Input() get color(): string {
+    return this._color;
+  }
+
+  set color(value: string) {
+    this._updateColor(value);
+  }
+
   /** Allows for programmatic focusing of the chip. */
   focus(): void {
     this._renderer.invokeElementMethod(this._elementRef.nativeElement, 'focus');
-    this.onFocus.emit({ chip: this });
+    this.onFocus.emit({chip: this});
   }
 
   /** Ensures events fire properly upon click. */
@@ -92,4 +129,27 @@ export class MdChip implements MdFocusable, OnInit, OnDestroy {
       this.focus();
     }
   }
+
+  /** Initializes the appropriate CSS classes based on the chip type (basic or standard). */
+  private _addDefaultCSSClass() {
+    let el: HTMLElement = this._elementRef.nativeElement;
+
+    if (el.nodeName.toLowerCase() == 'md-chip' || el.hasAttribute('md-chip')) {
+      el.classList.add('md-chip');
+    }
+  }
+
+  /** Updates the private _color variable and the native element. */
+  private _updateColor(newColor: string) {
+    this._setElementColor(this._color, false);
+    this._setElementColor(newColor, true);
+    this._color = newColor;
+  }
+
+  /** Sets the md-color on the native element. */
+  private _setElementColor(color: string, isAdd: boolean) {
+    if (color != null && color != '') {
+      this._renderer.setElementClass(this._elementRef.nativeElement, `md-${color}`, isAdd);
+    }
+  }
 }
diff --git a/src/lib/core/a11y/list-key-manager.spec.ts b/src/lib/core/a11y/list-key-manager.spec.ts
index 2d2e14eefa53..6a75c1be87ce 100644
--- a/src/lib/core/a11y/list-key-manager.spec.ts
+++ b/src/lib/core/a11y/list-key-manager.spec.ts
@@ -15,7 +15,7 @@ class FakeQueryList<T> extends QueryList<T> {
   }
 }
 
-class FakeEvent {
+export class FakeEvent {
   defaultPrevented: boolean = false;
   constructor(public keyCode: number) {}
   preventDefault() {