In the mouse, one of the earliest events in the determination of cell fate is the segregation of cells into germ layers during gastrulation; however, the cellular and molecular details are not well defined due to intrauterine development. We were able to visualize a clear sequence of events occurring in the process of germ-layer formation, using immunohistochemistry and time-lapse confocal imaging. The T-box transcription factor brachyury (T) and the Forkhead transcription factor Foxa2 specify mesoderm and endoderm in the posterior epiblast. Fate-specified epiblast cells lose their polarity and undergo epithelial-mesenchymal transition to invade into the primitive streak region, where these cell populations quickly separate and differentiate into morphologically and molecularly distinct Foxa2-positive endoderm and T-positive mesoderm populations. The endoderm cells flatten and acquire apical-basal polarity during intercalation into the outside epithelium in order to establish proper intracellular junctions with pre-existing cells. By contrast, the mesodermal cells become spherical during migration and acquire a mesenchymal fate. Interestingly, axial mesodermal cells are descended from Foxa2-positive epiblast cells that upregulate T protein in the anterior primitive streak region. These cells, as well as Foxa2-positive endoderm cells, are highly polarized and epithelialized, suggesting that Foxa2 promotes an epithelial fate and suppresses a mesenchymal fate. This observation is supported by the fact that Foxa2 mutant endodermal cells fail to maintain polarity and do not establish proper cellular junctions, and are thus unable to functionally integrate into the endoderm epithelium. We propose that Foxa2 regulates a molecular program that induces an epithelial cellular phenotype.