Mesenchymal stem cells or multipotent stromal cells (MSCs) isolated from the bone marrow of adult organisms were initially characterized as plastic adherent, fibroblastoid cells with the capacity to generate heterotopic osseous tissue when transplanted in vivo. In recent years, MSCs or MSC-like cells have been shown to reside within the connective tissue of most organs, and their surface phenotype has been well described. A large number of reports have also indicated that the cells possess the capacity to transdifferentiate into epithelial cells and lineages derived from the neuroectoderm. The broad developmental plasticity of MSCs was originally thought to contribute to their demonstrated efficacy in a wide variety of experimental animal models of disease as well as in human clinical trials. However, new findings suggest that the ability of MSCs to alter the tissue microenvironment via secretion of soluble factors may contribute more significantly than their capacity for transdifferentiation in tissue repair. Herein, we critically evaluate the literature describing the plasticity of MSCs and offer insight into how the molecular and functional heterogeneity of this cell population, which reflects the complexity of marrow stroma as an organ system, may confound interpretation of their transdifferentiation potential. Additionally, we argue that this heterogeneity also provides a basis for the broad therapeutic efficacy of MSCs.