The discovery of methods to convert somatic cells into induced pluripotent stem cells (iPSCs) through expression of a small combination of transcription factors has raised the possibility of producing custom-tailored cells for the study and treatment of numerous diseases. Indeed, iPSCs have already been derived from patients suffering from a large variety of disorders. Here we review recent progress that has been made in establishing iPSC-based disease models, discuss associated technical and biological challenges, and highlight possible solutions to overcome these barriers. We believe that a better understanding of the molecular basis of pluripotency, cellular reprogramming and lineage-specific differentiation of iPSCs is necessary for progress in regenerative medicine.