Muscle-derived cells have been successfully isolated using a variety of different methods and have been shown to possess multilineage differentiation capacities, including an ability to differentiate into articular cartilage and bone in vivo; however, the characterization of human muscle-derived stem cells (hMDSCs) and their bone regenerative capacities have not been fully investigated. Genetic modification of these cells may enhance their osteogenic capacity, which could potentially be applied to bone regenerative therapies. We found that hMDSCs, isolated by the preplate technique, consistently expressed the myogenic marker CD56, the pericyte/endothelial cell marker CD146, and the mesenchymal stem cell markers CD73, CD90, CD105, and CD44 but did not express the hematopoietic stem cell marker CD45, and they could undergo osteogenic, chondrogenic, adipogenic, and myogenic differentiation in vitro. In order to investigate the osteoinductive potential of hMDSCs, we constructed a retroviral vector expressing BMP4 and GFP and a lentiviral vector expressing BMP2. The BMP4-expressing hMDSCs were able to undergo osteogenic differentiation in vitro and exhibited enhanced mineralization compared to nontransduced cells; however, when transplanted into a calvarial defect, they failed to regenerate bone. Local administration of BMP4 protein and cell pretreatment with N-acetylcysteine (NAC), which improves cell survival, did not enhance the osteogenic capacity of the retro-BMP4-transduced cells. In contrast, lenti-BMP2-transduced hMDSCs not only exhibited enhanced in vitro osteogenic differentiation but also induced robust bone formation and nearly completely healed a critical-sized calvarial defect in CD-1 nude mice 6 weeks following transplantation. Herovici's staining of the regenerated bone demonstrated that the bone matrix contained a large amount of type I collagen. Our findings indicated that the hMDSCs are likely mesenchymal stem cells of muscle origin and that BMP2 is more efficient than BMP4 in promoting the bone regenerative capacity of the hMDSCs in vivo.