Stepwise differentiation from embryonic stem cells (ESCs) to functional insulin-secreting beta cells will identify key steps in beta-cell development and may yet prove useful for transplantation therapy for diabetics. An essential step in this schema is the generation of pancreatic progenitors--cells that express Pdx1 and produce all the cell types of the pancreas. High-content chemical screening identified a small molecule, (-)-indolactam V, that induces differentiation of a substantial number of Pdx1-expressing cells from human ESCs. The Pdx1-expressing cells express other pancreatic markers and contribute to endocrine, exocrine and duct cells, in vitro and in vivo. Further analyses showed that (-)-indolactam V works specifically at one stage of pancreatic development, inducing pancreatic progenitors from definitive endoderm. This study describes a chemical screening platform to investigate human ESC differentiation and demonstrates the generation of a cell population that is a key milepost on the path to making beta cells.