Cell therapies for neurological disorders require an extensive knowledge of disease-associated neuropathology and procedures for generating neurons for transplantation. In many patients with severe acquired temporal lobe epilepsy (TLE), the dentate gyrus exhibits sclerosis and GABAergic interneuron degeneration. Mounting evidence suggests that therapeutic benefits can be obtained by transplanting fetal GABAergic progenitors into the dentate gyrus in rodents with TLE, but the scarcity of human fetal cells limits applicability in patient populations. In contrast, virtually limitless quantities of neural progenitors can be obtained from embryonic stem (ES) cells. ES cell-based therapies for neurological repair in TLE require evidence that the transplanted neurons integrate functionally and replace cell types that degenerate. To address these issues, we transplanted mouse ES cell-derived neural progenitors (ESNPs) with ventral forebrain identities into the hilus of the dentate gyrus of mice with TLE and evaluated graft differentiation, mossy fiber sprouting, cellular morphology, and electrophysiological properties of the transplanted neurons. In addition, we compared electrophysiological properties of the transplanted neurons with endogenous hilar interneurons in mice without TLE. The majority of transplanted ESNPs differentiated into GABAergic interneuron subtypes expressing calcium-binding proteins parvalbumin, calbindin, or calretinin. Global suppression of mossy fiber sprouting was not observed; however, ESNP-derived neurons formed dense axonal arborizations in the inner molecular layer and throughout the hilus. Whole-cell hippocampal slice electrophysiological recordings and morphological analyses of the transplanted neurons identified five basic types; most with strong after-hyperpolarizations and smooth or sparsely spiny dendritic morphologies resembling endogenous hippocampal interneurons. Moreover, intracellular recordings of spontaneous EPSCs indicated that the new cells functionally integrate into epileptic hippocampal circuitry.