Interferon-beta (IFN-beta), an approved treatment of multiple sclerosis (MS), produces only partial clinical responses. IFN-beta therapy has been limited by its short serum half-life and limited ability to cross the blood brain barrier. We have developed a means of delivering the IFN-beta gene both systemically and into the central nervous system (CNS) using bone marrow stem cells (BMSCs) as a vehicle and examined the therapeutic efficacy of this approach in experimental autoimmune encephalomyelitis (EAE), an animal model of MS. A retroviral expression vector (pLXSN-IFNbeta) was used to stably transfect virus producer PA317 cells to generate retrovirus containing the IFN-beta gene which then was used to transduce BMSCs. IFN-beta engineered BMSCs were transplanted (i.v.) into mice that then were immunized with proteolipoprotein (PLP) to initiate EAE. IFN-beta-engineered BMSCs transplanted mice showed a significant inhibition of EAE onset, and the overall clinical severity was less compared to control groups. IFN-beta delivery strongly reduced infiltration of mononuclear cells possibly by inhibiting cell adhesion molecules. Reduced demyelination and increased remyelination were also observed in the IFN-beta treated group. Furthermore, inhibition of the pro-inflammatory cytokines TNF-alpha, IFN-gamma and IL-12 and enhanced expression of the anti-inflammatory cytokines IL-10, IL-4 and TGF-beta was observed in CNS tissue. In addition, mice receiving IFN-beta had reduced apoptosis and increases in growth promoting factors including BDNF, CNTF, PDGF and VEGF. These results suggest that BMSCs can be used as vehicles to deliver the IFN-beta into the CNS. This is a potentially novel therapeutic approach which might be used in MS and other diseases of the CNS in which drug access is limited.