Primitive endoderm in the peri-implantation mouse embryo differentiates into two separate lineages, visceral and parietal endoderm (VE and PE). F9 teratocarcinoma cells, when grown in suspension in the presence of retinoic acid (RA), differentiate into embryoid bodies (EBs) which can be used as a model system to study the spatially appropriate induction of VE- and PE-specific gene expression. We have used a whole mount in situ hybridization technique to follow the localization of VE-specific AFP and PE-specific tPA mRNAs during EB differentiation. We show that the putative endoderm-specific markers are localized to the endoderm in mature EBs, and that AFP mRNA is localized to the apical edge of the VE in RA EBs. Surprisingly, prior to localization of endoderm-specific markers at the periphery of EBs, these genes are expressed at low to moderate levels in all cells of the EB. Our data suggest that the establishment of endoderm in EBs is position dependent and not the result of sorting out of predetermined, randomly distributed cells. Our observations also suggest a two-step process for establishing endoderm-specific gene expression, involving up-regulation of transcripts throughout the EB prior to the restriction of their expression to the outer differentiating cell layer.