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The relatively recent discovery that MSCs derived from various tissues will differentiate into osteoblasts in the presence of osteopromotive medium has allowed for new therapeutic opportunities in bone tissue engineering. We recently described the in vitro characteristics of a demineralized bone scaffold containing adipose-derived mesenchymal stromal cells (DBM/hMSC) harvested from human adipose tissue and demonstrated that this combination contains the three components that are considered optimal for bone repair: an osteoconductive scaffold, osteoinductive signaling proteins and osteogenic cells. The objective of this study was to compare and characterize the in vivo bone- forming activity of DBM/hMSC to that of DBM alone, hMSCs alone, cortico-cancellous isograft and human cortico-cancellous xenograft in an athymic rat model. A series of animal experiments were performed comparing new bone formation in critical-sized bone defects implanted with DBM/hMSC, DBM, hMSC, corticocancellous isograft, human cortico-cancellous bone graft or no treatment (empty defect). New bone formation was greatest in bone defects implanted with DBM/hMSC when compared with DBM alone, hMSCs alone, corticocancellous bone isograft, or human corticocancellous bone graft. Together, these data support preclinical proof-of-concept that DBM/hMSC will enhance bone formation in challenging healing environments.