The formation of the pancreas from the endoderm layer takes place in different steps including the specification of the precursor territory, the outgrowth of pancreas buds, the differentiation of exocrine and endocrine cells, and the migration of endocrine cells which leads to islet formation. These processes are controlled by mesoderm-endoderm interactions and specific induction of a set of transcription factors. Deciphering the cascade of genes involved in beta-cell induction will provide essential tools to engineer cells for diabetes therapy.