In articular fractures, both bone and cartilage are injured. We tested whether stem cells transduced with bone morphogenetic protein 2 (BMP2) can promote bone and cartilage repair. Distal femoral articular osteotomies in nude rats were treated with stem cells, either wild-type or transduced with an adenoviral (Ad) BMP2. Cells were delivered in alginate (ALG) carrier or by direct injection in saline solution. Gene expression of these cells at the osteotomy site was confirmed by in vivo imaging. At day 14, only the group that received AdBMP2 stem cells by direct injection showed completely healed osteotomies, while other groups remained unhealed (P < 0.0003). In ALG groups, bone healing was impeded by the development of a chondroid mass, most pronounced in the AdBMP2 ALG group (P < 0.002). We were successful in achieving repair of both bone and cartilage in vivousing direct stem cell injection. Our data suggests that BMP2 augmentation might be critically important in achieving this effect.