Healthy Retinal Pigment Epithelium (RPE) cells are required for proper visual function and the phenomenon of RPE derivation from Human Embryonic Stem Cells (HESC) holds great potential for the treatment of retinal diseases. However, little is known about formation, expansion and expression profile of RPE-like cells derived from HESC (HESC-RPE). By studying the genesis of pigmented foci we identified OTX1/2-positive cell types as potential HESC-RPE precursors. When pigmented foci were excised from culture, HESC-RPE expanded to form extensive monolayers, with pigmented cells at the leading edge assuming a precursor role: de-pigmenting, proliferating, expressing keratin 8 and subsequently re-differentiating. As they expanded and differentiated in vitro, HESC-RPE expressed markers of both developing and mature RPE cells which included OTX1/2, Pax6, PMEL17 and at low levels, RPE65. In vitro, without signals from a developing retinal environment, HESC-RPE could produce regular, polarised monolayers with developmentally important apical and basal features. Following transplantation of HESC-RPE into the degenerating retinal environment of Royal College of Surgeons (RCS) dystrophic rats, the cells survived in the subretinal space, where they maintained low levels of RPE65 expression and remained out of the cell cycle. The HESC-RPE cells responded to the in vivo environment by downregulating Pax6, while maintaining expression of other markers. The presence of rhodopsin-positive material within grafted HESC-RPE indicates that in the future, homogenous transplants of this cell type may be capable of supporting visual function following retinal dystrophy.