An initial study showed that morselized human bone grafts were osteoconductive and osteoinductive when implanted in nude rat tibial window defects, and 25 kGy of gamma-irradiation significantly reduced those properties. The mechanism of the osteoinductivity and the influence of gamma-irradiation required further investigation. In this study we assessed the paraffin sections of seven morselized human bone grafts implanted into rat tibial defects for 3 weeks after being treated with 0, 15, or 25 kGy gamma-radiation respectively. Osteoclast-like cell counting and protein expressions of bone morphogenetic protein-7 (BMP-7), core binding factor alpha1 (CBFA1), and proliferating cell nuclear antigen (PCNA) were investigated and the positive signals were quantitatively analyzed. More new bone formation was observed in the 0 and 15 kGy groups compared with 25 kGy groups. The newly formed bones were found mainly from the intact cortex into the defects bridged by the implanted grafts. A dense staining of BMP-7 and CBFA1 was noted in the osteoblast-like cells in those areas. The BMP-7 and CBFA1 staining was also seen in the cells surrounding the implanted grafts in the centre areas of the defects in distance from the intact cortex. Quantitative analysis of immunohistochemical staining of the centre areas of the defects showed that gamma-irradiation (15 and 25 kGy) significantly reduced the expression of CBFA1 and BMP-7. In conclusion, morselized human bone grafts may contain some factors, which induced osteoblast lineage differentiation and bone formation and gamma-irradiation damages those bone inducing factors.