In vertebrates, heart development is a complex process requiring proper differentiation and interaction between myocardial and endocardial cells. Significant progress has been made in elucidating the molecular events underlying myocardial cell differentiation. In contrast, little is known about the development of the endocardial lineage that gives rise to cardiac valves and septa. We have used a novel in vitro model to identify the molecular hierarchy of endocardial differentiation and the role of transcription factor GATA5 in endocardial development. The results indicate that GATA5 is induced at an early stage of endothelial-endocardial differentiation prior to expression of such early endocardial markers as Tie2 and ErbB3. Inhibition of either GATA5 expression or NF-ATc activation, blocks terminal differentiation at a pre-endocardial stage and GATA5 and NF-ATc synergistically activate endocardial transcription. The data reveal that transcription factor GATA5 is required for differentiation of cardiogenic precursors into endothelial endocardial cells. This, in turn, suggests that the GATA5 pathway may be relevant to early stages of valvuloseptal development, defects of which account for the majority of human birth malformations.