Allogeneic stem cell transplantation has continued to evolve as a common procedure for the treatment of hematological malignancies and bone marrow failure. Donor bone marrow and mobilized peripheral stem cells are routinely employed for the reconstitution of immune function in leukemia and lymphoma patients following radiation and/or chemotherapy. Unfortunately, only 30% of patients have an HLA-identical sibling donor and the identification of matched unrelated donors, particularly for minorities, can present an exceptional challenge. The transplantation of umbilical cord blood (UCB) represents the most recent strategy to expand the potential donor pool while maintaining an acceptable level of treatment-related complications. First utilized in children, UCB transplantation permits a higher degree of HLA disparity while demonstrating a reduction in the incidence and severity of graft-versus-host disease (GvHD) compared to previous transplantation modalities. Despite the apparent decrease in GvHD, relapse rates remain comparable to transplantation with bone marrow or mobilized peripheral blood suggesting a strong graft-versus-leukemia/lymphoma (GvL) effect. However, several issues complicate the use of UCB transplantation and its extension to the treatment of adults. Many infections that afflict transplant patients are particularly frequent and more severe in the context of UCB transplantation. UCB T-cells are naive and therefore display less proliferation and IFN-gamma production in response to cognate antigen and also appear to demonstrate defects in signal transduction mechanisms. In addition, UCB contains T regulatory cells (Treg) with more potent suppressor function than adult Treg. Furthermore, adult patients often require more total cells and CD34+ progenitors for transplantation than a single UCB unit can provide. Thus, strategies to expand selected subpopulations from UCB and the use of multi-unit transplantation are areas of active research. This review will provide a condensed summary of the clinical history of UCB transplantation and emphasize the advantages and disadvantages of this approach to hematological malignancies in comparison to other methods of hematopoietic stem cell transplantation. Subsequently, it will mainly focus on the current challenges to immune reconstitution presented by UCB transplantation, recent research into their cellular and molecular mechanisms, and experimental approaches to overcome them.