The utilization of human hepatocytes for biomedical research, drug discovery, and treatment of liver diseases is hindered by the limited availability of donated livers and the variability of their derived hepatocytes. Human embryonic stem cells (hESCs) are pluripotent and provide a unique, unlimited resource for human hepatocytes. However, differentiation of hESCs to hepatocytes remains a challenge. We have developed a multistage procedure by which hESCs can be directly differentiated to hepatocyte-like cells without embryoid body formation and the requirement of sodium butyrate. The hESC-derived hepatocyte-like cells (HLCs) exhibited characteristic hepatocyte morphology, expressed hepatocyte markers, including alpha-fetoprotein, albumin, and hepatocyte nuclear factor 4alpha, and possessed hepatocyte-specific activities, such as p450 metabolism, albumin production, glycogen storage, and uptake and excretion of indocyanine green. Hepatocyte growth factor was found to play a positive role in promoting hepatocyte differentiation. Our differentiation system has shown that hESCs can be differentiated to hepatocyte-like cells capable of executing a range of hepatocyte functions. Therefore, it presents a proof-of-principle of potential applications of using the hESC-derived hepatocytes. Additionally, the hESC-derived HLCs provide a unique model to study the mechanisms involved in human hepatocyte differentiation and liver function.