The cellular and molecular events regulating the induction and tissue-specific differentiation of endoderm are central to our understanding of the development and function of many organ systems. To define and characterize key components in this process, we have investigated the potential of embryonic stem (ES) cells to generate endoderm following their differentiation to embryoid bodies (EBs) in culture. We found that endoderm can be induced in EBs, either by limited exposure to serum or by culturing in the presence of activin A (activin) under serum-free conditions. By using an ES cell line with the green fluorescent protein (GFP) cDNA targeted to the brachyury locus, we demonstrate that endoderm develops from a brachyury⁺ population that also displays mesoderm potential. Transplantation of cells generated from activin-induced brachyury⁺cells to the kidney capsule of recipient mice resulted in the development of endoderm-derived structures. These findings demonstrate that ES cells can generate endoderm in culture and, as such, establish this differentiation system as a unique murine model for studying the development and specification of this germ layer.