Type 1 diabetes (T1D) is an autoimmune disease that results from the destruction of insulin-producing pancreatic islet cells owing to the aggressive effector function of autoreactive T cells. In addition to lifetime supply of exogenous insulin, whole-pancreas or islet transplantation is presently the only alternative therapy for severely ill patients. Here, we discuss the current status of the development of cell-based therapies that are based on essentially two options, i.e. replacement of islet cells by islet-like cells derived from embryonic or adult stem cells, and re-establishment of immunological tolerance to islet self-antigens through regulatory T cells and/or tolerance-promoting monocyte-derived cells. A combination of both approaches will be required to turn cell-based therapy of T1D into clinical success.