The local environment plays an important role in osteogenic tissue regeneration. Our previous studies have shown that xenogenic transplantation of human mesenchymal stem cells (hMSCs) alone into immunodeficient mice did not result in long-term bone formation. This study investigates whether bone formation can be prolonged by incorporating human mesenchymal stem cells in mineralized scaffolds together with controlled delivery of a growth factor, BMP2. A composite of coralline hydroxyapatite (CHA) with poly(lactic-co-glycolic acid) (PLGA)-encapsulated rhBMP2 was incorporated with hMSCs in vitro. After 2 weeks in vitro culture the constructs were implanted subcutaneously in CB17 scid beige mice and harvested 10 weeks after implantation. The mineralized tissues were stained by using a fluorescent marker, 5FAM-risedronate, followed by observation with fluorescence microscopy, histology, histomorphometry, mouse-anti-human vimentin immunohistochemistry, and scanning microscopy. The results showed that compared with control materials in which only fibrous tissue formed following implantation of coralline scaffolds, bone-like tissue formed within the CHA composite containing PLGA encapsulated rhBMP2 and hMSCs for up to 10 weeks after implantation. Human cells, identified by the human vimentin-specific monoclonal antibody were seen within the bone-like tissue. In conclusion, incorporation of hMSCs into CHA with controlled delivery of BMP showed prolonged bone formation in immunodeficient mice. Further research is required to optimize the growth factor delivery system and to understand the underlying cellular and molecular mechanisms involved.