Although the reconstitution of a functional beta-cell mass by transplantation of isolated islets can restore euglycemia in the absence of insulin treatment, a shortage of donor material is one of the factors preventing the general use of cell replacement therapy for the treatment of type 1 diabetes mellitus (T1DM). Advances in the directed differentiation of pluripotent stem cells toward beta-cells via the stepwise recapitulation of embryonic development have generated proof of concept demonstrating that stem cells may be an appropriate source of cells for the generation of therapeutic beta-cells. However, progress toward a clinical application of this technology is slow and challenging. This review highlights some of the critical issues impeding the translation of stem cell-based diabetes therapies to the clinic.