In this study, we investigated a clinically relevant model of in vivo ectopic bone formation utilizing human periosteum derived cells (HPDCs) seeded in a Collagraft™ carrier and explored the mechanisms by which this process is driven. Bone formation occurred after eight weeks when a minimum of one million HPDCs was loaded on Collagraft™ carriers and implanted subcutaneously in NMRI nu/nu mice. De novo bone matrix, mainly secreted by the HPDCs, was found juxta-proximal of the calcium phosphate (CaP) granules suggesting that CaP may have triggered the ‘osteoinductive program’. Indeed, removal of the CaP granules by ethylenediaminetetraacetic acid decalcification prior to cell seeding and implantation resulted in loss of bone formation. In addition, inhibition of endogenous bone morphogenetic protein and Wnt signalling by overexpression of the secreted antagonists Noggin and Frzb, respectively, also abrogated osteoinduction. Proliferation of the engrafted HPDCs was strongly reduced in the decalcified scaffolds or when seeded with adenovirus-Noggin/Frzb transduced HPDCs indicating that cell division of the engrafted HPDCs is required for the direct bone formation cascade. These data suggest that this model of bone formation is similar to that observed during physiological intramembranous bone development and may be of importance when investigating tissue engineering strategies.