The availability of human stem cells heralds a new era for in vitro cell-based modeling of neurodevelopmental and neurodegenerative diseases. Adding to the excitement is the discovery that somatic cells of patients can be reprogrammed to a pluripotent state from which neural lineage cells that carry the disease genotype can be derived. These in vitro cell-based models of neurological diseases hold promise for monitoring of disease initiation and progression, and for testing of new drug treatments on the patient-derived cells. In this review, we focus on the prospective applications of different stem cell types for disease modeling and drug screening. We also highlight how the availability of patient-specific induced pluripotent stem cells (iPS cells) offers a unique opportunity for studying and modeling human neurodevelopmental and neurodegenerative diseases in vitro and for testing small molecules or other potential therapies for these disorders. Finally, the limitations of this technology from the standpoint of reprogramming efficiency and therapeutic safety are discussed.