The Masquelet induced membrane technique for reconstructing large diaphyseal defects has been shown to be a promising clinical treatment, yet relatively little is known about the cellular, histological and biochemical make-up of these membranes and how they produce this positive clinical outcome. We compared cellular make-up, histological changes and growth factor expression in membranes induced around femur bone defects and in subcutaneous pockets at 2, 4 and 6 weeks after induction, and to the periosteum. We found that membranes formed around bone defects were similar to those formed in subcutaneous pockets; however, both were significantly different from periosteum with regard to structural characteristics, location of blood vessels and overall thickness. Membranes induced at the femur defect (at 2 weeks) and in periosteum contain mesenchymal stem cells (MSCs; STRO-1+) which were not found in membranes induced subcutaneously. BMP-2, TGFβ and VEGF were significantly elevated in membranes induced around femur defects in comparison to subcutaneously induced membranes, whereas SDF-1 was not detectable in membranes induced at either site. We found that osteogenic and neovascular activity had mostly subsided by 6 weeks in membranes formed at both sites. It was conclude that cellular composition and growth factor content in induced membranes depends on the location where the membrane is induced and differs from periosteum. Osteogenic and neovascular activity in the membranes is maximal between 2 and 4 weeks and subsides after 6. Based on this, better and quicker bone healing might be achieved if the PMMA cement were replaced with a bone graft earlier in the Masquelet technique. Copyright © 2013 John Wiley & Sons, Ltd.