In the context of bone development and regeneration, the intimate association of the vascular endothelium with osteogenic cells suggests that endothelial cells (ECs) may directly regulate the differentiation of osteoprogenitor cells. To investigate this question, bone marrow stromal cells (BMSCs) were cultured: in the presence of EC-conditioned medium, on EC extracellular matrix, and in EC cocultures with and without cell contact. RNA and protein were isolated from ECs and analyzed by reverse transcriptase-polymerase chain reaction and Western blotting, respectively, for expression of bone morphogenetic protein 2 (BMP-2). In animal studies, BMSCs and ECs were cotransplanted into severe combined immunodeficient mice on biodegradable polymer matrices, and histomorphometric analysis was performed to determine the extent of new bone and blood vessel formation. ECs significantly increased BMSC osteogenic differentiation in vitro only when cultured in direct contact. ECs expressed BMP-2, and experiments employing interfering RNA inhibition confirmed its production as contributing to the increased BMSC osteogenic differentiation. In vivo, cotransplantation of ECs with BMSCs resulted in greater bone formation than did transplantation of BMSCs alone. These data suggest that ECs function not only to form the microvasculature that delivers nutrients to developing bone but also to modulate the differentiation of osteoprogenitor cells in vitro and in vivo.