We investigated ectopic cartilage and bone formation induced by transplantation of cells which were transfected with Sonic hedgehog (Shh) cDNA encoding amino-terminal peptide for gene therapy in bone regeneration. These results indicated Shh regulated early chondrogenesis and stimulation of prechondrocytes, and consequently the synergistic effects of Shh and BMP induced bone formation in vivo. In the future, further study of transfection of Shh combined with other gene groups regulating bone formation, or other bone-stimulating factors, or using new type of scaffold will be needed to confirm clinical application.