The majority of studies on stem cell differentiation have so far been based in vivo, on live animal models. The usefulness of such models is limited, since it is much more technically challenging to conduct molecular studies and genetic manipulation on live animal models compared to in vitro cell culture. Hence, it is imperative that efficient protocols for directing stem cell differentiation into well-defined lineages in vitro are developed. The development of such protocols would also be useful for clinical therapy, since it is likely that the transplantation of differentiated stem cells would result in higher engraftment efficiency and enhanced clinical efficacy, compared to the transplantation of undifferentiated stem cells. The in vitro differentiation of stem cells, prior to transplantation in vivo, would also avoid spontaneous differentiation into undesired lineages at the transplantation site, as well as reduce the risk of teratoma formation, in the case of embryonic stem cells. Hence, this review critically examines the various strategies that could be employed to direct and control stem cell differentiation in vitro.