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An essential step for therapeutic and research applications of stem cells is the ability to differentiate them into specific cell types. Endodermal cell derivatives, including lung, liver, and pancreas, are of interest for regenerative medicine, but efforts to produce these cells have been met with only modest success. In a screen of 4000 compounds, two cell-permeable small molecules were indentified that direct differentiation of ESCs into the endodermal lineage. These compounds induce nearly 80% of ESCs to form definitive endoderm, a higher efficiency than that achieved by Activin A or Nodal, commonly used protein inducers of endoderm. The chemically induced endoderm expresses multiple endodermal markers, can participate in normal development when injected into developing embryos, and can form pancreatic progenitors. The application of small molecules to differentiate mouse and human ESCs into endoderm represents a step toward achieving a reproducible and efficient production of desired ESC derivatives.