Type 1 diabetes is caused by a progressive destruction of insulin-producing cells(IPCs) by an autoimmune disease. Islet transplantation is considered as the most effective treatment for type 1 diabetes, but it is hindered by limited supply of islets. Mesenchymal stem cells(MSCs) can be isolated from several tissues and used in the differentiation into mesodermal cell types. Periosteum-derived progenitor cells(PDPCs), which have similar characteristics with MSCs, were easily isolated with high growth potency. Using a three-step differentiation protocol, PDPCs could be differentiated into IPCs. IPCs derived from PDPCs were evaluated by using microscope, RT-PCR and immunostaining. When three-dimensional suspension cultures were performed with the addition of fibronectin and various extracellular matrix(ECM), it was clear that PDPCs could differentiate into IPCs. Under optimized culture conditions, improved differentiation of PDPCs into IPCs was possible.