Promise of cellular therapy for type 1 diabetes has inspired the search for transplantable cell sources, and embryonic stem cells (ESCs) have emerged as strong candidates. We have developed a directed differentiation protocol to obtain insulin-producing cells from ESCs. The ESCs are first induced towards a homogeneous monolayer of definitive endoderm-like cells by co-culture with primary hepatocytes. Pancreatic commitment is induced by plating the ESC-derived endoderms on Matrigel, along with Sonic hedgehog inhibition and retinoid induction. More than 70% of differentiated cells positively upregulated Pdx-1, along with pro-endocrine transcription factors Ngn3, β2/neroD1, Nkx2.2 and Nkx6.1. Final maturation to islet-specific cells is achieved by co-culturing the ESC-derived pancreatic endocrine cells with endothelial cells, which resulted in Insulin 1 upregulation in 60% of the cell population, along with high levels of IAPP and Glut2. The differentiated cell population also secreted high levels of insulin. Our findings illustrate the significant effect of co-culture in different stages of differentiation and maturation of ESCs in vitro. Such a high yield of pancreatic islet cells has not yet been reported. Our findings establish a robust protocol for islet differentiation.