Abstract Polyurethane foams (PUFs) represent a significant segment of the polyurethane (PU) and cellular plastics industries, owing to their versatile applications and desirable properties. However, the production of PUFs heavily relies on petroleum‐derived chemicals, including polyols and isocyanates, raising critical environmental concerns. Lignin, an abundant aromatic macromolecule, offers a promising alternative for replacing petroleum‐based polyols because of its intrinsic hydroxyl groups. While efforts have been made to produce and apply various lignin‐based polyurethane foams (LPUFs), their commercialization remains limited by challenges such as low product consistency, poor technical performances, and high production costs. This study critically evaluates recent advances in the development of LPUFs, including innovative synthesis methods, functional applications, and emerging research trends. Moreover, potential strategies are discussed, such as lignin fractionation, modification, and co‐solvent assistance, for addressing the challenges. By resolving them, LPUFs could play a pivotal role in transitioning the PU industry to help achieve a circular bioeconomy.