The search for novel sources of stem cells other than bone marrow mesenchymal stem cells (MSCs) for bone regeneration and repair has been a critical endeavor. We previously established an effective protocol to homogeneously purify human pericytes from multiple fetal and adult tissues, including adipose, bone marrow, skeletal muscle, and pancreas, and identified pericytes as a primitive origin of human MSCs. In the present study, we further characterized the osteogenic potential of purified human pericytes combined with a novel osteoinductive growth factor, Nell-1. Purified pericytes grown on either standard culture ware or human cancellous bone chip (hCBC) scaffolds exhibited robust osteogenic differentiation in vitro. Using a nude mouse muscle pouch model, pericytes formed significant new bone in vivo as compared to scaffold alone (hCBC). Moreover, Nell-1 significantly increased pericyte osteogenic differentiation, both in vitro and in vivo. Interestingly, Nell-1 significantly induced pericyte proliferation and was observed to have pro-angiogenic effects, both in vitro and in vivo. These studies suggest that pericytes are a potential new cell source for future efforts in skeletal regenerative medicine, and that Nell-1 is a candidate growth factor able to induce pericyte osteogenic differentiation.