Human embryonic stem (hES) cells represent a potentially unlimited source of transplantable β-cells for the treatment of diabetes. Here we describe a differentiation strategy that reproducibly directs HES3, an National Institutes of Health (NIH)-registered hES cell line, into cells of the pancreatic endocrine lineage. HES3 cells are removed from their feeder layer and cultured as embryoid bodies in a three-dimensional matrix in the presence of Activin A and Bmp4 to induce definitive endoderm. Next, growth factors known to promote the proliferation and differentiation of pancreatic ductal epithelial cells to glucose-sensing, insulin-secreting β-cells are added. Pdx1 expression, which identifies pancreatic progenitors, is detected as early as day 12 of differentiation. By day 34, Pdx1⁺ cells comprise between 5% and 20% of the total cell population and Insulin gene expression is up-regulated, with release of C-peptide into the culture medium. Unlike another recent report of the induction of insulin⁺ cells in differentiated hES cell populations, we are unable to detect the expression of other pancreatic hormones in insulin⁺ cells. When transplanted into severe combined immunodeficiency (SCID) mice, differentiated cell populations retain their endocrine identity and synthesize insulin.