Repair of skeletal defects with vascularized bone grafts has many advantages over non-vascularized free grafts, but the availability of these grafts is extremely limited. This study was designed to determine whether new vascularized bone could be engineered by transplantation of osteoblasts around existing vascular pedicles using biodegradable, synthetic polymer as a cell delivery vehicle. Cells were isolated from the periosteum of fetal bovine humerus, and then seeded onto non-woven multifilament, polyglycolic acid polymer. The polymers provided three dimensional support during in vitro culture. The cell-polymer constructs were maintained in vitro for two weeks and then implanted around the right femoral vessels of twelve athymic nude rats. The polymer templates without the cells were implanted around left femoral vessels of each mouse as a control. Twelve rats were sacrificed at the following intervals: three rats at six,and nine rats at nine weeks. New bone formation was evident in 10 out of the 12 periosteal-derived cell seeded implants. At six weeks, the tissue was primarily composed of what appeared both grossly and histologically to be cartilage enveloping small islands of osteoid. The degree of osteoid and bone formation progressed with time, as blood vessels invaded the tissue. This tissue ultimately underwent morphogenesis to become an organized trabeculated bone with a vascular pedicle. We believe that this technique may prove to be useful in the reconstruction of bony defect.