Derivation of bone forming cells (osteoblasts) from human embryonic stem cells (hESCs) is a prerequisite for their use in clinical applications. However, there is no standard protocol for differentiating hESCs into osteoblastic cells. The aim of this study was to identify the emergence of a human stromal (mesenchymal and skeletal) stem cell (hMSC)-like population, known to be osteoblastic cell precursors and to test their osteoblastic differentiation capacity in ex vivo cultures and in vivo. We cultured hESCs in a feeder-free environment using serum replacement and as suspension aggregates (embryoid bodies; hEBs). Over a 20 day developmental period, the hEBs demonstrated increasing enrichment for cells expressing hMSC markers: CD29, CD44, CD63, CD56, CD71, CD73, CD105, CD106, and CD166 as revealed by immunohistochemical staining and flow cytometry (fluorescence-activated cell sorting) analysis. Ex vivo differentiation of hEBs using bone morphogenic protein 2 (BMP2) combined with standard osteoblast induction medium led to weak osteoblastic induction. Conversely, subcutaneous in vivo implantation of day 20 hEBs in immune deficient mice, mixed with hydroxyapatite/tricalcium phosphate (HA/TCP) as an osteoconductive scaffold, revealed bone and cartilage, and fibrous tissue elements after 8 weeks. These tissues were of human origin and there was no evidence of differentiation to nonmesodermal tissues. hEBs implanted in the absence of HA/TCP formed vacuolated tissue containing glandular, fibrous and muscle-like tissue elements. Conversely, implantation of undifferentiated hESCs resulted in the formation of a teratoma containing a mixture of endodermal, mesodermal, and ectodermal tissues. Our study demonstrates that hMSC-like cells can be obtained from hESCs and they can be induced to form skeletal tissues in vivo when combined with HA/TCP. These findings are relevant for tissue engineering and suggest that differentiated hEBs can provide an unlimited source for functional osteogenic cells.