Bone grafts are an important part of orthopaedic surgeon's armamentarium. Despite well-established bone-grafting techniques, large bone defects still represent a challenge. Efforts have therefore been made to develop osteoconductive, osteoinductive, and osteogenic bone-replacement systems. The long-term clinical goal in bone tissue engineering is to reconstruct bony tissue in an anatomically functional three-dimensional morphology. Current bone tissue engineering strategies take into account that bone is known for its ability to regenerate following injury, and for its intrinsic capability to re-establish a complex hierarchical structure during regeneration. Although the tissue engineering of bone for the reconstruction of small to moderate sized bone defects technically feasible, the reconstruction of large defects remains a daunting challenge. The essential steps towards optimized clinical application of tissue-engineered bone are dependent upon recent advances in the area of neovascularization of the engineered construct. Despite these recent advances, however, a gap from bench to bedside remains; this may ultimately be bridged by a closer collaboration between basic scientists and reconstructive surgeons. The aim of this review is to introduce the basic principles of tissue engineering of bone, outline the relevant bone physiology, and discuss the recent concepts for the induction of vascularization in engineered bone tissue.