Mesenchymal stem cells (MSCs) have been identified in animals, especially in bone marrow. As stem cells, they have the ability to differentiate into multiple cell types. This potential raises exciting therapeutic possibilities. A recent report described the successful use of MSCs for the treatment of graft-versus-host disease; however, the scientific community has yet to define the molecular mechanisms of immunomodulation by MSCs. This review summarizes what is known and discusses the conflicting data with regard to the mechanisms of immunomodulation by MSCs.