Development of a cell therapy for diabetes would be greatly aided by a renewable supply of human beta-cells. Here we show that pancreatic endoderm derived from human embryonic stem (hES) cells efficiently generates glucose-responsive endocrine cells after implantation into mice. Upon glucose stimulation of the implanted mice, human insulin and C-peptide are detected in sera at levels similar to those of mice transplanted with approximately 3,000 human islets. Moreover, the insulin-expressing cells generated after engraftment exhibit many properties of functional beta-cells, including expression of critical beta-cell transcription factors, appropriate processing of proinsulin and the presence of mature endocrine secretory granules. Finally, in a test of therapeutic potential, we demonstrate that implantation of hES cell-derived pancreatic endoderm protects against streptozotocin-induced hyperglycemia. Together, these data provide definitive evidence that hES cells are competent to generate glucose-responsive, insulin-secreting cells.