Bone defects larger than a critical size are major challenges in orthopedic medicine. We combined tissue-engineered bone and gene therapy to provide osteoprogenitor cells, osteoinductive factors, and osteo-conductive carrier for ideal bone regeneration in critical-sized bone defects. Goat diaphyseal bone defects were repaired with tissue and genetically engineered bone implants, composed of biphasic calcined bone (BCB) and autologous bone marrow derived mesenchymal stem cells (BMSC) transduced with human bone morphogenetic protein-2 (hBMP-2). Twenty six goats with tibial bone defects were divided into groups receiving implants by using a combination of BCB and BMSCs with or without the hBMP-2 gene. In eight goats that were treated with BCB that contained hBMP-2 transduced BMSC, five had complete healing and three showed partial healing. Goats in other experimental groups had only slight or no healing. Furthermore, the area and biochemical strength of the callus in the bone defects were significantly better in animals treated with genetically engineered implants. We concluded that the combination of genetic and tissue engineering provides an innovative way for treating critical-sized bone defects.