Adipose tissue-derived stem cells (ASCs) are multipotent stem cells capable of forming bone, muscle, and other connective tissues. Human ASCs were shown to differentiate into insulin-producing cells (IPCs) in vitro. In this study, we investigated whether IPCs differentiated from human ASCs can have in vivo functionality in diabetic mice. We differentiated human ASCs into IPCs using a differentiation cocktail containing valproic acid, a histone deacetylase inhibitor, and examined the expression of insulin mRNA by quantitative real-time PCR. In addition, we examined the expression of ngn3, pdx1, pax6, and glucagon mRNA by RT-PCR, pdx1 and insulin by immunocytochemistry, and insulin release by ELISA. We also transplanted the differentiated cells into the pancreas of streptozotocin- induced diabetic mice and examined blood glucose and serum human insulin levels and performed glucose tolerance tests. Addition of 10 mM of valproic acid to the differentiation cocktail increased insulin mRNA expression about 5-fold compared with cells differentiated without valproic acid. Differentiated cells expressed mRNAs for pancreas-related genes such as ngn3, pdx1, pax6, and glucagon and released insulin in response to glucose. Transplantation of the differentiated cells into streptozotocin-induced diabetic mice resulted in human insulin production and regeneration of endogeneous islets contributing to lowering blood glucose levels and improving glucose tolerance. Based on these results, we conclude that inhibition of histone deacetylase can enhance beta cell differentiation from human ASCs and that differentiated IPCs might be an alternative beta cell source for diabetes treatment.