The neoplastic process may involve a cancer stem cell. This concept has emerged largely from the careful analysis of tumour biopsy systems from haematological, breast and brain tumours. However, the experimental systems necessary to provide the cellular and molecular evidence to support this important concept have been lacking. We have used adult mesenchymal stem cells (hMSC) transduced with the telomerase hTERT gene to investigate the neoplastic potential of adult stem cells. The hTERT-transduced line, hMSC-TERT20 at population doubling level (PDL) 256 showed loss of contact inhibition, anchorage independence and formed tumours in 10/10 mice. hMSC-TERT4 showed loss of contact inhibition at PDL 95, but did not exhibit anchorage independence and did not form tumours in mice. Both lines had a normal karyotype but showed deletion of the Ink4a/ARF locus. At later passage, hMSC-TERT4 also acquired an activating mutation in KRAS. In hMSC-TERT20, expression of the cell cycle-associated gene, DBCCR1 was lost due to promoter hypermethylation. This epigenetic event correlated with acquisition of tumorigenicity. These data suggest that the adult hMSCs can be targets for neoplastic transformation and have implications for the development of novel anticancer therapeutics and for the use of hMSC in tissue engineering and transplantation protocols.