Bone repair is one of the major challenges facing reconstructive surgery. Bone regeneration is needed for the repair of large defects and fractures. The ability of TGF-beta1 and IGF-1 incorporated into hydrogel scaffold to induce bone regeneration was evaluated in a rat tibia segmental defect model. External fixation was performed prior to the induction of the segmental bone defect in order to stabilize the defect site. Hydrogel scaffold containing either TGF-beta, IGF-1, TGF-beta + IGF-1, hydrogel containing saline or saline, were inserted in the defect. Calcified material was observed in the defects treated with TGF-beta 2 weeks following the start of treatment. Bone defects treated with TGF-beta, IGF-1 or TGF-beta + IGF-1 revealed significant bone formation after 4 and 6 weeks when compared to the control specimens. X-ray images showed that solid bone was present at the defect site after 6 weeks of treatment with TGF-beta or TGF-beta + IGF-1. A less pronounced bone induction was observed in the control specimens and bones treated with IGF-1. Percent closure ratio of bone defects after 6 weeks were 40, 80, 89, and 97% for saline, hydrogel, IGF-1, TGF-beta and IGF-1 + TGF-beta groups, respectively. It is concluded that hydrogel scaffold can serve as a good osteoconductive matrix for growth factors, and that it provides a site for bone regeneration and enhances bone defect healing and could be used as alternative graft material.