Endogenous stem cell recruitment to the site of skeletal injury is key to enhanced osseous remodeling and neovascularization. To this end, this study utilized a novel bone allograft coating of poly(lactic-co-glycolic acid) (PLAGA) to sustain the release of FTY720, a selective agonist for sphingosine 1-phosphate (S1P) receptors, from calvarial allografts. Uncoated allografts, vehicle-coated, low dose FTY720 in PLAGA (1:200 w:w) and high dose FTY720 in PLAGA (1:40) were implanted into critical size calvarial bone defects. The ability of local FTY720 delivery to promote angiogenesis, maximize osteoinductivity and improve allograft incorporation by recruitment of bone progenitor cells from surrounding soft tissues and microcirculation was evaluated. FTY720 bioactivity after encapsulation and release was confirmed with sphingosine kinase 2 assays. HPLC-MS quantified about 50% loaded FTY720 release of the total encapsulated drug (4.5 μg) after 5 days. Following 2 weeks of defect healing, FTY720 delivery led to statistically significant increases in bone volumes compared to controls, with total bone volume increases for uncoated, coated, low FTY720 and high FTY720 of 5.98, 3.38, 7.2 and 8.9 mm(3), respectively. The rate and extent of enhanced bone growth persisted through week 4 but, by week 8, increases in bone formation in FTY720 groups were no longer statistically significant. However, micro-computed tomography (microCT) of contrast enhanced vascular ingrowth (MICROFIL®) and histological analysis showed enhanced integration as well as directed bone growth in both high and low dose FTY720 groups compared to controls.