Pluripotent embryonic stem (ES) cells have the potential to differentiate to all fetal and adult cell types and might represent a useful cell source for tissue engineering and repair. Here we show that differentiation of ES cells toward the osteoblast lineage can be enhanced by supplementing serum-containing media with ascorbic acid, beta-glycerophosphate, and/or dexamethasone/retinoic acid or by co-culture with fetal murine osteoblasts. ES cell differentiation into osteoblasts was characterized by the formation of discrete mineralized bone nodules that consisted of 50-100 cells within an extracellular matrix of collagen-1 and osteocalcin. Dexamethasone in combination with ascorbic acid and beta-glycerophosphate induced the greatest number of bone nodules and was dependent on time of stimulation with a sevenfold increase when added to ES cultures after, but not before, 14 days. Co-culture with fetal osteoblasts also provided a potent stimulus for osteogenic differentiation inducing a fivefold increase in nodule number relative to ES cells cultured alone. These data demonstrate the application of a quantitative assay for the derivation of osteoblast lineage progenitors from pluripotent ES cells. This could be applied to obtain purified osteoblasts to analyze mechanisms of osteogenesis and for use of ES cells in skeletal tissue repair.