Human mesenchymal stem cells (hMSCs) are an attractive tissue engineering avenue for the repair and regeneration of bone. In this study we detail the in vivo performance of a novel electrospun polycaprolactone scaffold incorporating the glycosaminoglycan heparan sulfate (HS) as a carrier for hMSC. HS is a multifunctional regulator of many key growth factors expressed endogenously during bone wound repair, and we have found it to be a potent stimulator of proliferation in hMSCs. To assess the potential of the scaffolds to support hMSC function in vivo, hMSCs pre-committed to the osteogenic lineage (human osteoprogenitor cells) were seeded onto the scaffolds and implanted subcutaneously into the dorsum of nude rats. After 6 weeks the scaffolds were retrieved and examined by histological methods. Implanted human cells were identified using a human nuclei-specific antibody. The host response to the implants was characterized by ED1 and ED2 antibody staining for monocytes/macrophages and mature tissue macrophages, respectively. It was found that the survival of the implanted human cells was affected by the host response to the implant regardless of the presence of HS, highlighting the importance of controlling the host response to tissue engineering devices.