Derived from the inner cell mass of blastocysts, embryonic stem cells (ESCs) retain the pluripotent features of early embryonic epiblast cells. In vitro, ESCs undergo spontaneous differentiation into a multitude of tissues, and thus are a powerful tool for the study of early developmental processes and a promising resource for cell-based therapies. We have pursued the derivation of functional, multipotent and engraftable hematopoietic stem cells (HSCs) from ESCs in order to investigate the genetic pathways specifying blood formation, as well as to lay the foundation for hematopoietic cell replacement therapies based on engineered ESCs. Theoretically, the generation of HSCs from patient-specific ESCs derived by nuclear transfer could provide for autologous hematopoietic therapies for the treatment of malignant and genetic bone marrow disorders. Although significant progress has been made in achieving hematopoietic differentiation from both murine and human ESCs, we have only a primitive understanding of the underlying mechanisms that specify hematopoietic cell fate, and a very limited capacity to direct the differentiation of the definitive HSC that would be suitable for clinical engraftment studies. Here we will review the progress to date and the significant problems that remain, and outline a strategy to achieve the directed differentiation of HSCs under conditions that might be appropriate for clinical scale-up and disease applications.