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The transplantation of insulin-producing β-cells derived from human embryonic stem cells and induced pluripotent stem cells (collectively termed pluripotent stem cells or PSCs) holds great promise for therapy of diabetes mellitus. The purpose of this review is to summarize recent advances in this area, emphasizing the importance of studies of endocrine pancreas development in efforts to direct PSC differentiation into endocrine cells, as well as to outline the major challenges remaining before transplantation of PSC-derived β-cells can become a reality.Although several protocols to generate glucose-responsive pancreatic β-cells in vitro have been described, the most successful approaches are those that most closely mimic embryonic development of the endocrine pancreas. Until recently, cells generated by these methods have exhibited immature pancreatic endocrine phenotypes. However, protocols that generate more functional β-like cells have now been described. In addition, small molecules are being used to improve protocols to direct differentiation of PSCs into endoderm and pancreatic lineages.Advances over the last decade suggest that generating functional β-cells from human PSCs is achievable. However, there are aspects of β-cell development that are not well understood and are hampering generation of PSC-derived β-cells. In particular, the signaling pathways that instruct endocrine progenitor cells to differentiate into mature and functional β-cells are poorly understood. Other significant obstacles remain, including the need for safe and cost-effective differentiation methods for large-scale generation of transplantation quality β-cells, methods to prevent immune rejection of grafted tissues, and amelioration of the risks of tumorigenesis.