Recent advances in molecular biology have led the way for novel approaches to improve bone healing. The ideal growth factor, vector, and delivery systems for producing bone in an immune competent animal model, however, have yet to be identified. Using a retrovirus encoding BMP4 and recently isolated muscle-derived stem cells (MDSCs), we demonstrated the following: MDSCs undergo osteogenic differentiation in response to BMP4 in a dose-dependent manner; retrovirus encoding BMP4 can efficiently transduce MDSCs, both enhancing osteogenic differentiation and inhibiting myogenic differentiation; transduced MDSCs can produce high levels of functional BMP4 as they differentiate toward an osteogenic lineage; allogeneic transduced MDSCs can induce robust de novo bone formation in immunocompetent mice despite the presence of an immune reaction, demonstrating the ability of this retroviral-BMP4-muscle construct to provide sufficient stimuli for osteoinduction in vivo; MDSCs appear to deliver BMP4, respond to the human BMP4 in an autocrine manner, and actively participate in bone formation, thus serving both osteoinductive and osteoproductive roles; and the BMP4-expressing MDSCs can induce bone formation and improve bone healing in a critical-sized skull defect in immunocompetent mice. Therefore, we believe that technology based on the MDSCs and vector system has great potential for promoting bone healing in a variety of musculoskeletal conditions.