Synthetic scaffolds are crucial to applications in regenerative medicine; however, the foreign body response can impede regeneration and may lead to failure of the implant. Herein we report the development of a tissue engineering scaffold that allows attachment and proliferation of regenerating cells while reducing the foreign body response by localized delivery of an anti-inflammatory agent. Electrospun fibers composed of poly(l-lactic) acid (PLLA) and poly(ε-caprolactone) (PCL) were prepared with and without the steroid anti-inflammatory drug, dexamethasone. Analysis of subcutaneous implants demonstrated that the PLLA fibers encapsulating dexamethasone evoked a less severe inflammatory response than the other fibers examined. They also displayed a controlled release of dexamethasone over a period of time conducive to tissue regeneration and allowed human mesenchymal stem cells to adhere to and proliferate on them in vitro. These observations demonstrate their potential as a building block for tissue engineering scaffolds.