Balanced island development is a very important topic in the promotion of balanced regional development. The problem of geographic and traffic isolation of the islands has resulted in the economic downturn and the trend of emigration in numerous island communities in the Republic of Croatia. Therefore, the research analyzes the possibility of developing the island of Pašman through EU funds. The aim of the research is to determine the state of development of Croatian islands and the possibilities of its improvement, with emphasis on co-financing through EU funds. The results of the research, carried out using the case study method of the island of Pašman and other islands of the Zadar County, indicate the strengths and weaknesses in the system of financing of island development through EU funds. An example of the island of Pašman shows that the set of projects related to the reconstruction of the infrastructure and the provision of adequate services of public importance, created the basic prerequisite for the development of small and medium-sized entrepreneurship in tourism, agriculture and fisheries and at the same time created the basic preconditions for the return of the population to the island providing further economic prosperity. An example of Pašman municipality shows that infrastructure projects co-financed by EU funds have been used to create a stimulating investment climate for greenfield investments and the municipality is currently in the process of finding investors to build a hotel resort. On the other hand, some island municipalities in the Zadar County are unjustifiably assessed by a higher development index which prevents them from using EU funds, and this administrative barrier needs to be removed by revising the parameters for calculation of the development index.