Traumatic peripheral nerve neurotmesis occurs frequently and functional recovery is often slow and impaired. Induced pluripotent stem cells (iPSCs) have shown much promise in recent years due to its regenerative properties similar to that of embryonic stem cells. However, the potential of iPSCs in promoting the functional recovery of a transected peripheral nerve is largely unknown. This study is the first to investigate in vivo effects of episomal iPSCs (EiPSCs) on peripheral nerve regeneration in a murine sciatic nerve transection model. Episomal iPSCs refer to iPSCs that are generated via Oct3/4-Klf4-Sox2 plasmid reprogramming instead of the conventional viral insertion techniques. It represents a relatively safer form of iPSC production without permanent transgene integration which may raise questions regarding risks of genomic mutation. A minimal number of EiPSCs were added directly to the transected nerve. Functional recovery of the EiPSC group was significantly improved compared to the negative control group when assessed via serial five-toe spread measurement and gait analysis of ankle angles. EiPSC promotion of nerve regeneration was also evident on stereographic analysis of axon density, myelin thickness, and axonal cross-sectional surface area. Most importantly, the results observed in EiPSCs are similar to that of the embryonic stem cell group. A roughly ten-fold increase in neurotrophin-3 levels was seen in EiPSCs which could have contributed to peripheral nerve regeneration and recovery. No abnormal masses or adverse effects were noted with EiPSC administration after one year of follow-up. We have hence shown that functional recovery of the transected peripheral nerve can be improved with the use of EiPSC therapy, which holds promise for the future of nerve regeneration.