The recent development of technologies capable of producing induced pluripotent stem (iPS) cells from adult somatic tissues may permit their use to generate autologous retinal pigment epithelium (RPE) grafts for the treatment of diseases like age-related macular degeneration. However, conventional reprogramming techniques are based on random genomic integration of four transcription factors with oncogenic potential. To minimize the risk of tumor formation, the use of iPS cells reprogrammed with a reduced number of these factors would be advantageous. We therefore evaluated the differentiation capacity of iPS cells generated from primary human epidermal keratinocytes by lentiviral transduction with only two or one factor (Oct4 and Klf4 or Oct4 only, respectively) and additional treatment with small molecules. Human iPS cells reprogrammed by conventional methods were used for comparison. Four factor-, two factor-, and one factor-derived iPS cells could be differentiated into cells that expressed RPE-specific markers (e.g., bestrophin, CRALBP, RPE65, tyrosinase). Moreover, these cells exhibited morphological and functional features characteristic of RPE cells such as formation of epithelial monolayers with intercellular tight junctions, homogenous polygonal morphology, pronounced pigmentation, phagocytosis of photoreceptor outer segments, and vectorial apical-to-basolateral fluid transport. Furthermore, we have demonstrated that the 1-factor iPSC-derived RPE cells, when injected into a rodent model of atrophic macular degeneration, could establish grafts of RPE and prevent the degeneration of photoreceptors (neurons) in this model. Thus, we demonstrate that human iPS cells generated by novel reprogramming techniques can be differentiated into cells with RPE-specific morphology, gene/protein expression and function. Compared to conventional iPS cells, these cells may be superior for clinical application due to the elimination of oncogenic reprogramming factors and, ultimately, retroviral transfection vectors.