An ex vivo gene therapy strategy was used to achieve localized skeletal regeneration in vivo. When an adenovirus vector engineered to express bone morphogenetic protein 7 transduced human gingival fibroblasts or rat dermal fibroblasts, these nonosteogenic tissues formed bone and supported the development of hematopoietic tissue when transplanted into immunocompromised mice. Transduced gingival fibroblasts formed marrow-containing ossicles in 100% of transplants after 1-2 weeks in vivo (n = 30). Immunostaining with murine and human-specific antisera raised against osteonectin and in situ hybridization of human-specific Alu genomic sequence demonstrated that the newly formed bone organ was a chimera of both the human donor and the mouse recipient cells. In experiments of greater clinical relevance, AdCMVBMP-7-transduced dermal fibroblasts repaired critical size skeletal defects in rat calvariae (n = 6). The results of this study suggest a bifunctional role of BMP-7-transduced fibroblasts. The transduced, nonosteogenic cells not only secreted biologically active BMP-7 in vitro and in vivo, but also differentiated into bone-forming cells in vivo. This model exploits the use of an easily biopsied, self-regenerating tissue such as gingiva or skin and suggests that local regeneration of tissues by ex vivo gene therapy may not require that autogenous cells be cultured from the tissue that is to be regenerated.