Recent progress in understanding stem cell biology has been remarkable, especially in deciphering signals that support differentiation towards tissue-specific lineages. This achievement positions us firmly at the beginning of an era of patient-specific regenerative medicine and human disease modeling. It will be necessary to equip the progress in this era with a reliable source of self-renewing progenitor cells that differentiate into functional target cells. The generation of pancreatic progenitors that mature in vivo into functional beta-cells has raised the hope for new therapeutic options in diabetes, but key challenges still remain including the production of sufficient numbers of cells for research and transplantation. Recent approaches to this problem have shown that the presence of organ- and stage-specific mesenchyme improves the generation of progenitors, from endoderm to endocrine cells. Alternatively, utilization of three-dimensional culture may improve the efficiency and yield of directed differentiation. Here, we review the current knowledge of pancreatic directed differentiation and ex vivo expansion of pancreatic progenitors, including recent advances in differentiation strategies for the generation of pancreatic progenitors, and we discuss persistent challenges which will need to be overcome before personalized cell-based therapy becomes a practical strategy.