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Mesenchymal stem cells (MSCs) are clonal, plastic adherent cells from bone marrow that can differentiate into various tissue lineages, including osteoblasts, adipocytes, chondrocytes, myoblasts, hepatocytes, and possibly even neural cells. Because MSCs are multipotent and their numbers are easily expanded in culture, there has been much interest in their clinical potential for tissue repair and gene therapy. Consequently, numerous studies have been carried out demonstrating the migration and multiorgan engraftment potential of MSCs in animal models and in human clinical trials. Understanding the mechanisms behind MSC cell fate determination is not easy, because the molecular processes that drive engraftment and differentiation are complex. Even in an in vitro system, the molecular cues necessary to induce differentiation are not easily identified or reproduced. In this Perspective, we emphasize the importance of microenvironmental factors in culture and suggest that MSC differentiation in vitro is regulated by a two-stage mechanism involving preconditioning by factors in the culture microenvironment followed by response to soluble differentiating factors.