A C680 flight crew failed to comply with the 'at 1500 MSL' crossing restriction at WENTZ on the RUUDY 2 RNAV SID from TEB. Later determined they had failed to engage the VNAV function of the FMS; which was directing a climb to 2000 MSL; the ultimate altitude to which they were cleared via the SID. The altitude alert window had been set to 2000 vice the more restrictive 1500.

Narrative

We departed TEB Runway 24 on the 'RUUDY TWO RNAV DEPARTURE'. We had briefed the SID which was new to both crew members. All altitude restrictions were reviewed and noted in the FMS. The aircraft was set up for an RNAV departure with the NAV function engaged and the top of the departure of 2000' set. After departure the aircraft was hand flown to 1500' on a 240 degree heading and leveled off. Then the FMS sequenced the turn to a heading of 260 degrees. direct to WENTZ. At this point the Captain thought that the sequence was indicating the passing of WENTZ and when the FLIGHT DIRECTOR commanded the climb to 2000' we left 1500'. At approximately 1800' the First Officer noticed that we had not passed WENTZ and we started descending back to 1500'. Descending through 1600' ATC inquired about our altitude. No other aircraft were in the area and there was no traffic conflict. ATC made no further inquiries and we were handed off to the next sector which immediately cleared us up to 10000'. Upon review of what could have gone wrong and as to why the FLIGHT DIRECTOR had commanded a climb prior to WENTZ we determined the following. At takeoff the lateral NAV function was engaged but the VNAV function was not. The FLIGHT DIRECTOR was simply indicating the climb to the altitude in the Altitude Selector not the Step Climb reviewed in the FMS.