AbstractDiabetes is characterized by decreased function of insulin‐producing β cells and insufficient insulin output resulting from an absolute (Type 1) or relative (Type 2) inadequate functional β cell mass. Both forms of the disease would greatly benefit from treatment strategies that could enhance β cell regeneration and/or function. Successful and reliable methods of generating β cells or whole islets from progenitor cells in vivo or in vitro could lead to restoration of β cell mass in individuals with Type 1 diabetes and enhanced β cell compensation in Type 2 patients. A thorough understanding of the normal developmental processes that occur during pancreatic organogenesis, for example, transcription factors, cell signaling molecules, and cell–cell interactions that regulate endocrine differentiation from the embryonic pancreatic epithelium, is required in order to successfully reach these goals. This review summarizes our current understanding of pancreas development, with particular emphasis on factors intrinsic or extrinsic to the pancreatic epithelium that are involved in regulating the development and differentiation of the various pancreatic cell types. We also discuss the recent progress in generating insulin‐producing cells from progenitor sources. Birth Defects Research (Part C) 87:232–248, 2009. © 2009 Wiley‐Liss, Inc.