A chondroitin sulfate-bone marrow (CS-BM) adhesive hydrogel was used to localize rhBMP-2 to enhance articular cartilage tissue formation. Chondrocyte pellet culture revealed that 0.1 and 1 μg/mL of rhBMP-2 enhanced sulfated-GAG content. rhBMP-2 localization within the hydrogels was investigated, and it was found that BM, CS-NHS, and rhBMP-2 levels and time affected rhBMP-2 retention. Retention was modulated from 82 to 99% over a 3-week period for the material formulations investigated. To evaluate carrier efficacy, rhBMP-2 and bovine articular chondrocytes were encapsulated within CS-BM, and biochemical evaluation revealed significant increases in total collagen production with rhBMP-2. Histological analysis revealed more robust tissue formation and greater type-II collagen production with encapsulated rhBMP-2. Subsequently, a subcutaneous culture of hydrogels revealed increased total collagen, type-II to type-I collagen ratio, and sulfated GAG in samples carrying rhBMP-2. These findings indicate the development of a multifunctional system capable of localizing rhBMP-2 to enhance repair tissue quality.