Orthopaedic surgeons are often faced with difficult bone loss problems. Conventional bone grafting is usually accomplished with autogenous iliac crest bone graft that provides osteogenic cells, osteoinductive growth factors, and an osteoconductive matrix. Cadaveric bone allograft and bone graft substitutes are inferior to autogenous bone graft because they fail to supply osteogenic cells or a significant amount of osteoinductive growth factors. Recombinant growth factors such as bone morphogenetic protein-2 and osteogenic protein-1 are currently in clinical use but these proteins require supraphysiologic dosing and considerable expense while failing to provide a sustained osteoinductive signal at the implantation site. Mesenchymal stem cells capable of differentiating into mesodermal tissues have been isolated and expanded in culture from several different sources including bone marrow, adipose tissue, and muscle. In the presence of appropriate growth factors these cells can differentiate into osteoblast lineage cells that will form bone in vitro and in vivo. Recent attention has focused on genetic modification of mesenchymal stem cells to both produce and respond to osteogenic growth factors with the goal of developing a tissue engineering strategy for bone repair. This review examines the current potential and limitations of these cellular systems for bone repair.