The pancreas originates from the definitive endoderm-derived gut epithelium. Much has been learnt about the specification of the gut endoderm into pancreatic progenitors and their derivatives, the endocrine (islets of Langerhans) and exocrine cells, by various transcription factors and growth factors. Human embryonic stem cells have emerged as a potential tool for studying human pancreas development and as a source for islet cells in cell replacement therapy of diabetes. Progress in using different strategies for differentiating endoderm and functional insulin-producing beta cells from embryonic stem cells will be discussed.