Individuals infected with the AIDS virus (HIV) often show many abnormalities of the blood system, suggesting that infection somehow alters the function of the bone marrow, which is the original source of all blood cell lineages. Currently controversy rages in the field regarding whether HIV directly infects developing blood cells in the bone marrow, or if it manifests these effects indirectly. In this study, we exposed immature developing blood cells, known as hematopoietic progenitor cells, to HIV. In addition, we infected humanized mice, mice engineered to contain a human blood system, with HIV. In both of these cases we noted that HIV infection decreased the ability of bone marrow-derived progenitor cells to form red blood cell and white blood cell colonies, indicating that the presence of HIV perturbed hematopoiesis, the process of forming mature blood cells. In addition we demonstrated direct infection of some early blood cell progenitor cells, indicating that direct infection of these progenitor cells is at least in part responsible for the decrease in bone marrow function seen in HIV disease. These results have important implications regarding reservoirs for virus infection in the body, and for development of stem cell therapeutic strategies for HIV disease.