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Type 1 diabetes generally results from autoimmune destruction of pancreatic islet beta-cells, with consequent absolute insulin deficiency and complete dependence on exogenous insulin treatment. The relative paucity of donations for pancreas or islet allograft transplantation has prompted the search for alternative sources for beta-cell replacement therapy. In the current study, we used pluripotent undifferentiated human embryonic stem (hES) cells as a model system for lineage-specific differentiation. Using hES cells in both adherent and suspension culture conditions, we observed spontaneous in vitro differentiation that included the generation of cells with characteristics of insulin-producing beta-cells. Immunohistochemical staining for insulin was observed in a surprisingly high percentage of cells. Secretion of insulin into the medium was observed in a differentiation-dependent manner and was associated with the appearance of other beta-cell markers. These findings validate the hES cell model system as a potential basis for enrichment of human beta-cells or their precursors, as a possible future source for cell replacement therapy in diabetes.