Gaucher disease (GD) is an autosomal recessive disorder caused by mutations in the acid beta-glucocerebrosidase (GBA) gene. The hallmark of GD is the presence of lipid-laden Gaucher macrophages, which infiltrate bone marrow and other organs. These pathological macrophages are believed to be the source of elevated levels of inflammatory mediators present in the serum of GD patients. The alteration in the immune environment caused by GD is believed to play a role in the increased risk of developing multiple myeloma and other malignancies in GD patients. To determine directly whether Gaucher macrophages are abnormally activated and if their functional defects can be reversed by pharmacological intervention, we generated GD macrophages by directed differentiation of human iPS cells (hiPSC) derived from patients with types 1, 2, and 3 GD. GD hiPSC-derived macrophages expressed higher levels of TNF alpha, IL-6, and IL-1beta than control cells, and this phenotype was exacerbated by treatment with LPS. In addition, GD hiPSC macrophages exhibited a striking delay in clearance of phagocytosed red blood cells, recapitulating the presence of RBC remnants in Gaucher macrophages from bone marrow aspirates. Incubation of GD hiPSC macrophages with recombinant glucocerebrosidase, or with the chaperones isofagomine and ambroxol, corrected the abnormal phenotypes of GD macrophages to an extent that reflected their known clinical efficacies. We conclude that Gaucher macrophages are the likely source of the elevated levels of inflammatory mediators in the serum of GD patients, and that GD hiPSC are valuable new tools for studying disease mechanisms and drug discovery.