An alternative to bone grafting is engineered osteo-conductive material that carries osteo-progenitor cells with osteo-stimulant factors impregnated on a malleable osteo-conductive material. We used bone marrow stem cells as the source of osteo-progenitor cells and stimulated them with prostaglandin E-2 using demineralised bone matrix as a carrier. We treated 35 skeletally mature male Wistar albino rats with segmentary radial bone defects using five different treatment groups. Group I received no treatment; the remaining four groups all received a mixture of bone marrow and demineralised bone matrix. In group III, a copolymer was added. In group IV, prostaglandin E-2 and in group V prostaglandin E-2 within a copolymer was added to the mixture. Eight weeks after the surgical procedure, the rats were sacrificed. Radiological and histological evaluation of the radial bone showed that while there was no significant healing in groups I, II and III, there was a significant healing response in groups IV and V.