Injury induces the recruitment of bone marrow-derived cells (BMDCs) that contribute to the repair and regeneration process. The behavior of BMDCs in injured tissue has a profound effect on repair, but the regulation of BMDC behavior is poorly understood. Aberrant recruitment/retention of these cells in wounds of diabetic patients and animal models is associated with chronic inflammation and impaired healing. BMD Gr-1+CD11b+ cells function as immune suppressor cells and contribute significantly to tumor-induced neovascularization. Here we report that Gr-1+CD11b + cells also contribute to injury-induced neovascularization, but show altered recruitment/retention kinetics in the diabetic environment. Moreover, diabetic-derived Gr-1+CD11b+ cells fail to stimulate neovascularization in vivo and have aberrant proliferative, chemotaxis, adhesion, and differentiation potential. Previously we demonstrated that gene transfer of HOXA3 to wounds of diabetic mice is taken up by and expressed by recruited BMDCs. This is associated with a suppressed inflammatory response, enhanced neovascularization, and accelerated wound healing. Here we show that sustained expression of Hoxa3 in diabetic-derived BMD Gr-1 +CD11b+ cells reverses their diabetic phenotype. These findings demonstrate that manipulation of adult stem/progenitor cells ex vivo could be used as a potential therapy in patients with impaired wound healing.