The FDA has approved the clinical use of recombinant bone morphogenetic proteins (BMPs). However, the use of recombinant BMPs in humans has required large doses of the proteins to be effective, which suggests that the delivery method of bone morphogenetic proteins needs to be optimized. Gene therapy is an alternative method to deliver such recombinant proteins, and gene transfer techniques have been tested on a variety of cell types including bone marrow cells, skin fibroblasts, peripheral blood monocytes, and muscle-derived cells. In this study, we sought to determine the ability of BMP-2-producing human adipose-derived mesenchymal stem cells to heal a critically sized femoral defect in a nude rat model. After approval by the human subjects protection committee, human adipose tissue was obtained from healthy donors. The lipoaspirate was processed as previously described (De Ugarte, D.A., et al. Cells Tissues Organs 174, 101, 2003). Cells were grown in culture and infected with a BMP-2-carrying adenovirus. Five million cells were applied to a collagen- ceramic carrier and implanted into femoral defects as previously described (Zuk, P.A., et al. Mol. Biol. 13, 4279, 2002). All animals were killed at 8 weeks. Femora were dissected out and underwent radiographic, histologic, and biomechanical analysis. Eleven of the 12 femora in the group treated with human processed lipoaspirate (HPLA) cells genetically modified to overexpress BMP-2 had healed at 8 weeks. This was assessed by radiographs, by mechanical testing, and by histology. The one femur that did not heal had a subacute infection. All eight of the femora treated with the rhBMP-2-impregnated collagen-ceramic carrier healed. No statistically significant difference was detected between these two groups. Evaluation of the control groups: group II (collagen- ceramic carrier with HPLA cells) and group III (collagen-ceramic carrier alone) showed that none of the femora had healed by 8 weeks. Our results indicate that HPLA cells genetically modified by adenoviral gene transfer to overexpress BMP-2 can induce bone formation in vivo and heal a critically sized femoral defect in an athymic rat. The HPLA cells alone did not induce significant bone formation. However, when combined with an osteoinductive factor these cells may be an effective method for enhancing bone healing and the tissue engineering of bone.