Most contemporary biomaterial designs for osteochondral regeneration utilize monolithic, biphasic, or even multiphasic constructs. We have introduced a microsphere-based approach to create a continuous gradient in both material composition and encapsulated growth factors. The gradients were fabricated by filling a cylindrical mold with opposing gradients of two different types of poly(D,L-lactic-co-glycolic acid) microspheres. The chondrogenic microspheres were loaded with transforming growth factor-β1, whereas the osteogenic microspheres contained bone morphogenetic protein-2 with or without nanophase hydroxyapatite. The gradient scaffolds (material gradient only, signal gradient only, or material/signal gradient combination) or blank control scaffolds were implanted in 3.5 mm-diameter defects in rabbit knees for 6 or 12 weeks. This is the first in vivo evaluation of these novel gradient scaffolds in the knee. The gross morphology, MRI, and histology indicated that the greatest extent of regeneration was achieved when both signal and material gradients were included together. This combination resulted in complete bone ingrowth, with an overlying cartilage layer with high glycosaminoglycan content, appropriate thickness, and integration with the surrounding cartilage and underlying bone. The results suggest that osteochondral regeneration may benefit from biomaterials that integrate a continuous gradient in both material composition and encapsulated growth factors.