Type 1 diabetes mellitus is caused by an autoimmune destruction of pancreatic islet beta cells, leading to insulin deficiency. Beta-cell replacement is considered the optimal treatment for type 1 diabetes, however it is severely limited by the shortage of human organ donors. An effective cell replacement strategy depends on the development of an abundant supply of beta cells and their protection from recurring immune destruction. Stem/progenitor cells, which can be expanded in tissue culture and induced to differentiate into multiple cell types, represent an attractive source for generation of cells with beta-cell properties: insulin biosynthesis, storage, and regulated secretion in response to physiologic signals. Embryonic stem cells have been shown to spontaneously differentiate into insulin-producing cells at a low frequency, and this capacity could be further enhanced by tissue culture conditions, soluble agents, and expression of dominant transcription factor genes. Progenitor cells from fetal and adult tissues, such as liver and bone marrow, have also been shown capable of differentiation towards the beta-cell phenotype in vivo, or following expression of dominant transcription factors in vitro. These approaches offer novel ways for generation of cells for transplantation into patients with type 1 diabetes.