The endocrine pancreas develops from cells of the endoderm which in response to extracellular signals express the transcription factor PDX1 that subsequently induces formation of the pancreas. At a later stage neurogenin 3 (ngn3) is activated in a sub-set of cells that are then destined to become endocrine cells. The final stage of differentiation to the various cell types of the islets of Langerhans is controlled by a number of transcription factors including PAX4 and PDX1 (in a second wave of expression). The aim of this study was to determine whether these events could be recapitulated in vitro using mouse embryonic stem (ES) cells. To generate definitive endoderm the mouse CGR8 ES cell line was cultured in chemically defined media as embryoid bodies (EBs) for three days in BMP4 and activin A followed by three days in activin A. RNA was extracted and RT-PCR as well as QPCR used to follow the expression of genes representative of the three germ layers, i.e. ectoderm (PAX6, Sox1 and Zic1), mesoderm (Bry, Flk1 and Nox1) and endoderm (Sox17, Foxa2 and Cxcr4 mainly expressed in definitive endoderm (DE), AFP mainly expressed in extraembryonic endoderm (EEE) and Sox7 exclusively expressed in EEE). The results showed the presence of DE with low levels of EEE markers. Differentiation from DE to pancreatic endoderm was achieved by incubating the EBs for a further four days in retinoic acid and FGF10. This led to the appearance of cells that expressed PDX1 and Ptf1a. To induce differentiation to endocrine pancreas clonal cell lines were generated in which transcription factors such as PDX1 and PAX4 were regulated by the presence of tamoxifen in the medium. The results showed that C-peptide positive cells could be generated in a manner that was dependent on the temporal expression of transcription factors. In conclusion, this model system provides a tool for dissecting the early and late events that lead to the formation of functional islets.