Embryonic stem (ES) cells hold great promise with respect to their potential to be differentiated into desired cell types. Of interest are organs derived from the definitive endoderm, such as the pancreas and liver, and animal studies have revealed an essential role for Nodal in development of the definitive endoderm. Activin A is a related TGFβ member that acts through many of the same downstream signaling effectors as Nodal and is thought to mimic Nodal activity. Detailed characterization of ES cell-derived endodermal cell types by gene expression analysis in vitro and functional analysis in vivo reveal that, despite their similarity in gene expression, Nodal and Activin-derived endodermal cells exhibit a distinct difference in functional competence following transplantation into the developing mouse embryo. Pdx1-expressing cells arising from the respective endoderm populations exhibit extended differences in their competence to mature into insulin/c-peptide-expressing cells in vivo. Our findings underscore the importance of functional cell-type evaluation during stepwise differentiation of stem cells.