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Reprogramming somatic cells into an ESC-like state, or induced pluripotent stem (iPS) cells, has emerged as a promising new venue for customized cell therapies. In this study, we performed directed differentiation to assess the ability of murine iPS cells to differentiate into bone, cartilage, and fat in vitro and to maintain an osteoblast phenotype on a scaffold in vitro and in vivo. Embryoid bodies derived from murine iPS cells were cultured in differentiation medium for 8–12 weeks. Differentiation was assessed by lineage-specific morphology, gene expression, histological stain, and immunostaining to detect matrix deposition. After 12 weeks of expansion, iPS-derived osteoblasts were seeded in a gelfoam matrix followed by subcutaneous implantation in syngenic imprinting control region (ICR) mice. Implants were harvested at 12 weeks, histological analyses of cell and mineral and matrix content were performed. Differentiation of iPS cells into mesenchymal lineages of bone, cartilage, and fat was confirmed by morphology and expression of lineage-specific genes. Isolated implants of iPS cell-derived osteoblasts expressed matrices characteristic of bone, including osteocalcin and bone sialoprotein. Implants were also stained with alizarin red and von Kossa, demonstrating mineralization and persistence of an osteoblast phenotype. Recruitment of vasculature and microvascularization of the implant was also detected. Taken together, these data demonstrate functional osteoblast differentiation from iPS cells both in vitro and in vivo and reveal a source of cells, which merit evaluation for their potential uses in orthopedic medicine and understanding of molecular mechanisms of orthopedic disease.