Diseases that affect endodermally derived organs such as the lungs, liver, and pancreas include cystic fibrosis, chronic hepatitis, and diabetes, respectively. Despite the prevalence of these diseases, cures remain elusive. While several promising transplantation-based therapies exist for some diseases such as Type 1 diabetes, they are currently limited by the availability of donor-derived tissues. Embryonic stem cells are a promising and renewable source of tissue for transplantation; however, directing their differentiation into specific, adult cell lineages remains a significant challenge. In this review, we will focus on one endodermally derived organ, the pancreas, and discuss how studies of embryonic pancreas development have been used as the basis for the directed, step-wise differentiation of mouse and human embryonic stem cells into pancreatic endocrine cells that are capable of rescuing Type 1 diabetes in animal models. Developmental Dynamics 236:3218–3227, 2007. © 2007 Wiley-Liss, Inc.