Human embryonic stem (hES) cells provide an important means to evaluate specific soluble and cell-bound stimuli that regulate development of specific cell lineages. Here, we examined specific cytokines and extracellular matrix (ECM) proteins that support differentiation of hES cells to hepatocytes. Tests of several different conditions determined that addition of fibroblast growth factor (FGF)-4 and hepatocyte growth factor in completely serum-free cultures of hES cell-derived embryoid bodies subsequently allowed to attach to type I collagen-coated dishes led to maximal differentiation into cells, not only with the morphologic and phenotypic characteristics of hepatocytes but also the functional characteristics. Expression of common hepatic transcription factors including HNF-3beta, HNF-1, and GATA-4 were all significantly induced under these conditions. Hepatocyte function was demonstrated by multiple complementary criteria: production of urea and albumin, phenobarbital-induced cytochrome P450 expression, and uptake of indocyanine green. These hES cell-derived hepatocytes will serve as a resource to understand normal human hepatocyte development and for applications such as cell replacement therapies and screening of pharmacologic drugs.