Recent breakthroughs in the generation of induced pluripotent stem cells (iPSCs) have provided a novel renewable source of cells with embryonic stem cell-like properties, which may potentially be used for gene therapy and tissue engineering. Although iPSCs have been differentiated into various cell types, iPSC-derived keratinocytes have not yet been obtained. In this study, we report the in vitro differentiation of mouse iPSCs into a keratinocyte lineage through sequential applications of retinoic acid and bone-morphogenetic protein-4 and growth on collagen IV-coated plates. We show that iPSCs can be differentiated into functional keratinocytes capable of regenerating a fully differentiated epidermis, hair follicles, and sebaceous glands in an in vivo environment. Keratinocytes derived from iPSCs displayed characteristics similar to those of primary keratinocytes with respect to gene and protein expression, as well as their ability to differentiate in vitro and to reconstitute normal skin and its appendages in an in vivo assay. At present, no effective therapeutic treatments are available for many genetic skin diseases. The development of methods for the efficient differentiation of iPSCs into a keratinocyte lineage will enable us to determine whether genetically corrected autologous iPSCs can be used to generate a permanent corrective therapy for these diseases.