Bone grafting is crucial in the surgical treatment of bone defects and nonunion fractures. Autogenous bone, allogenous bone, and biomaterial scaffold are three main sources of bone grafts. The biomaterial scaffold, both natural and synthetic, is widely accessible but weak in osteogenic potential. One approach to solve this problem is cell-based bone tissue engineering (BTE), established by growing living osteogenic cells on scaffold in vitro to build up its osteoinducitive capability. Mesenchymal stem cell (MSC) is suitable for use in cell-based BTE, but it remains a considerable challenge to induce MSCs to form solely bone and while preventing MSCs from differentiating into fats, muscles, and possibly neural elements in vivo. Recently, there is a drastic rise in use of genetically engineered MSCs, which can secrete growth factors or alter the transcription level, leading to osteoblast lineage commitment, bone formation, fracture repair, and spinal fusion. In this article, we reviewed the literatures regarding applications of genetically engineered MSCs in BTE. We addressed the currently applicable genes and candidate genes for MSCs modification, transduction efficiency and safety issues of the transfect vectors, and administration routes, and we briefly described in vivo tracking and potential clinical application of the genetically modified MSCs in BTE. Anat Rec, 293:531-537, 2010. V V C 2009 Wiley-Liss, Inc.