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beta-Cell transplantation is viewed as a cure for type 1 diabetes; however, it is limited by the number of pancreas donors. Human stem cells offer the promise of an abundant source of insulin-producing cells, given the existence of methods for manipulating their differentiation. We have previously demonstrated that the expression of the beta-cell transcription factor pancreatic duodenal homeobox 1 (PDX-1) in human fetal liver cells activates multiple aspects of the beta-cell phenotype. These cells, termed FH-B-TPN cells, produce insulin, release insulin in response to physiological glucose levels, and replace beta-cell function in diabetic immunodeficient mice. However, they deviate from the normal beta-cell phenotype by the lack of expression of a number of beta-cell genes, the expression of non-beta-cell genes, and a lower insulin content. Here we aimed to promote differentiation of FH-B-TPN cells toward the beta-cell phenotype using soluble factors. Cells cultured with activin A in serum-free medium upregulated expression of NeuroD and Nkx2.2 and downregulated paired box homeotic gene 6 (PAX-6). Glucokinase and prohormone convertase 1/3 were also upregulated, whereas pancreatic polypeptide and glucagon as well as liver markers were downregulated. Insulin content was increased by up to 33-fold, to approximately 60% of the insulin content of normal beta-cells. The cells were shown to contain human C-peptide and release insulin in response to physiological glucose levels. Cell transplantation into immunodeficient diabetic mice resulted in the restoration of stable euglycemia. The cells continued to express insulin in vivo, and no cell replication was detected. Thus, the manipulation of culture conditions induced a significant and stable differentiation of FH-B-TPN cells toward the beta-cell phenotype, making them excellent candidates for beta-cell replacement in type 1 diabetes. [ABSTRACT FROM AUTHOR]