The pancreas is a compound gland comprised of both exocrine acinar and duct cells as well as endocrine islet cells. Most notable amongst the latter are the insulin-synthesizing β-cells, loss or dysfunction of which manifests in diabetes mellitus. All exocrine and endocrine cells derive from multipotent pancreatic progenitor cells arising from the primitive gut epithelium via inductive interactions with adjacent mesodermal tissues. Research in the last two decades has revealed the identity of many of these extrinsic cues and they include signaling molecules used in many other developmental contexts such as retinoic acid, fibroblast growth factors, and members of the TGF-β superfamily. As important as these inductive cues is the absence of other signaling molecules such as hedgehog family members. Much has been learned about the interactions of extrinsic factors with fate regulators intrinsic to the pancreatic endoderm. This new knowledge has had tremendous impact on the development of directed differentiation protocols for converting pluripotent stem cells to β-cells in vitro.