Mesenchymal stem cells (MSCs) can differentiate into non-hematopoietic cell types, including adipocytes, chondrocytes and osteocytes. MSCs have been isolated from multiple species, including humans, and multiple organs, including bone marrow, adipose tissue and umbilical cord blood. The beneficial effects of MSCs are being tested clinically in attempts to: improve hematopoietic engraftment, to treat osteogenesis imperfecta, graft-versus-host disease and autoimmune diseases, and as antitumor agents to deliver therapy for malignancies. Phase I clinical studies have not been associated with toxicities. We aimed to investigate the capacity of MSCs to aid in tissue healing after radiation induced injury in irradiated bone marrow transplant (BMT) recipients. To study the biodistribution of MSCs, we labeled adult murine C57BL/6 MSCs with firefly luciferase and DsRed2 fluorescent protein using non-viral Sleeping Beauty transposons, and co-infused them with allogeneic bone marrow into irradiated reipients. Using in vivo whole body bioluminenscent imaging luciferase signals were shown to be increased between weeks 3 and 12 indicating expansion of MSCs. Unexpectedly, some mice (N=8/17) with the highest luciferase signals died and all surviving mice (N=9/17) developed foci of ectopic ossification in lungs. Two of mice also developed osteosarcomas in their extremities. This prompted us to characterize the transformed MSCs that originated from the donor MSCs. The transformed cells were aneuploid, lost their capacity to differentiate into mesenchyme-derived adipocytes and chondrocytes, and histologically identified as osteosarcomas. In addition, infusion of tumor cells resulted in malignant lesions in secondary recipients. Mapping of transposition sites in the genome and karyotype analysis indicated that the critical transformation event(s) occurred before infusion of the MSCs. Even though we have not encountered a transformation event in >100 mice infused with MSC manipulated with transposons, we speculated that mutation by transposition was the inciting event. None of the identifiable transposition events occurred in a known proto-oncogene or tumor suppressor gene. This does not discount the possibility of insertional mutagenesis as the genomic lesion may have occurred on the chromosome which was subsequently disrupted or lost. Alternatively, genomic instability could have been a result of spontaneous unrepaired chromosomal lesion(s) that preceded the transposon insertion and resulted in osteosarcoma. These findings provide evidence of evolution of MSCs with osteogenic capacity into osteosarcoma in vivo and are clinically relevant as they document the potential of ex vivo manipulated MSCs for transformation into malignant disease.