Stimulation of bone formation by osteoinductive materials is of great clinical importance in spinal fusion surgery, repair of bone fractures, and in the treatment of osteoporosis. We previously reported that specific naturally occurring oxysterols including 20(S)-hydroxycholesterol (20S) induce the osteogenic differentiation of pluripotent mesenchymal cells, while inhibiting their adipogenic differentiation. Here we report the characterization of two structural analogues of 20S, Oxy34 and Oxy49, which induce the osteogenic and inhibit the adipogenic differentiation of bone marrow stromal cells (MSC) through activation of Hedgehog (Hh) signaling. Treatment of M2-10B4 MSC with Oxy34 or Oxy49 induced the expression of osteogenic differentiation markers Runx2, Osterix (Osx), alkaline phosphatase (ALP), bone sialoprotein (BSP), and osteocalcin (OCN), as well as ALP enzymatic activity and robust mineralization. Treatment with oxysterols together with PPARγ activator, troglitazone (Tro), inhibited mRNA expression for adipogenic genes PPARγ, LPL, and aP2, and inhibited the formation of adipocytes. Efficacy of Oxy34 and Oxy49 in stimulating bone formation in vivo was assessed using the posterolateral intertransverse process rat spinal fusion model. Rats receiving collagen implants with Oxy 34 or Oxy49 showed comparable osteogenic efficacy to BMP2/collagen implants as measured by radiography, MicroCT, and manual inspection. Histological analysis showed trabecular and cortical bone formation by oxysterols and rhBMP2 within the fusion mass, with robust adipogenesis in BMP2-induced bone and significantly less adipocytes in oxysterol-induced bone. These data suggest that Oxy34 and Oxy49 are effective novel osteoinductive molecules and may be suitable candidates for further development and use in orthopedic indications requiring local bone formation.