Type I diabetes is characterized by the deficiency of endocrine β cells in the pancreatic islets of Langerhans and transplantation of islet cells can be an effective therapeutic approach. Embryonic stem cells can be differentiated into any cell type, and therefore represent an unlimited source of islet cells for the transplantation and treatment for type I diabetes. We have adopted an easy and reproducible in vitro differentiation system with a reduced serum concentration plus nicotinamide to generate early pancreatic progenitor cells from embryonic stem cells. Gene expression analysis indicated that the differentiated cells expressed not only endoderm markers such as GATA-4, HNF-3β, but also early markers of pancreatic development including key transcription factors PDX-1 and IAPP. Some pancreatic specific markers, such as insulin I, insulin II, Glu-2 and glucagon, were also expressed to some extent at the mRNA level. Differentiated ES cells showed low level immunoreactivity for insulin. However, transplantation of these early pancreatic progenitor clusters into STZ-induced diabetic mice failed to reverse the hyperglycemic state of the disease as reported previously. The results suggest that culture manipulation can direct ES cells to differentiate into early pancreatic progenitor cells committing to pancreatic islet cell fate, but these cells cannot function normally to reduce blood glucose of diabetic mice at this stage.