Osteogenesis imperfecta (OI) is caused by dominant mutations in the type I collagen genes. In principle, the skeletal abnormalities of OI could be treated by transplantation of patient-specific, bone-forming cells that no longer express the mutant gene. Here, we develop this approach by isolating mesenchymal cells from OI patients, inactivating their mutant collagen genes by adeno-associated virus (AAV)-mediated gene targeting, and deriving induced pluripotent stem cells (iPSCs) that were expanded and differentiated into mesenchymal stem cells (iMSCs). Gene-targeted iMSCs produced normal collagen and formed bone in vivo, but were less senescent and proliferated more than bone-derived MSCs. To generate iPSCs that would be more appropriate for clinical use, the reprogramming and selectable marker transgenes were removed by Cre recombinase. These results demonstrate that the combination of gene targeting and iPSC derivation can be used to produce potentially therapeutic cells from patients with genetic disease.