Embryonic stem (ES) cells have the capacity to differentiate into various cell types in vitro. In this study, we show that retinoic acid is important for the commitment of ES cells into osteoblasts. Culturing retinoic acid treated ES cells in the presence of the osteogenic supplements ascorbic acid and P-glycerophosphate resulted in the expression of several osteoblast marker genes, osteocalcin, alkaline phosphatase, and osteopontin. However, there was only a slight amount of mineralized matrix secretion. Addition of bone morphogenic protein-a or compactin, a drug of the statin family of HMG-CoA reductase inhibitors, resulted in a greatly enhanced formation of bone nodules. Compactin did not modify the expression of osteogenic markers, but at the late stage of differentiation promoted an increase in BMP-S expression. These results establish ES-cell derived osteogenesis as an effective model system to study the molecular mechanisms by which the statin compactin promotes osteoblastic differentiation and bone nodule formation.