We have used homologous recombination in human embryonic stem cells (hESCs) to insert sequences encoding green fluorescent protein (GFP) into the NKX2.1 locus, a gene required for normal development of the basal forebrain. Generation of NKX2.1-GFP⁺ cells was dependent on the concentration, timing, and duration of retinoic acid treatment during differentiation. NKX2.1-GFP⁺ progenitors expressed genes characteristic of the basal forebrain, including SHH, DLX1, LHX6, and OLIG2. Time course analysis revealed that NKX2.1-GFP⁺ cells could upregulate FOXG1 expression, implying the existence of a novel pathway for the generation of telencephalic neural derivatives. Further maturation of NKX2.1-GFP⁺ cells gave rise to γ-aminobutyric acid-, tyrosine hydroxylase-, and somatostatin-expressing neurons as well as to platelet-derived growth factor receptor α-positive oligodendrocyte precursors. These studies highlight the diversity of cell types that can be generated from human NKX2.1⁺ progenitors and demonstrate the utility of NKX2.1^GFP/w hESCs for investigating human forebrain development and neuronal differentiation.