The greatest therapeutic promise of human embryonic stem cells (hESC) is to generate specialized cells to replace damaged tissue in patients suffering from various degenerative diseases. However, the signaling mechanisms involved in lineage restriction of ESC to adopt various cellular phenotypes are still under investigation. Furthermore, for progression of hESC-based therapies towards clinical applications, appropriate culture conditions must be developed to generate genetically stable homogenous populations of cells, to hinder possible adverse effects following transplantation. Other critical challenges that must be addressed for successful cell implantation include problems related to survival and functional efficacy of the grafted cells. This review initially describes the derivation of hESC and focuses on recent advances in generation, characterization, and maintenance of these cells. We also give an overview of original and emerging differentiation strategies used to convert hESC to different cell types. Finally, we will discuss transplantation studies of hESC-derived cells with respect to safety and functional recovery.