Bone Morphogenetic Protein-2 (BMP-2) plays an important role in stimulating new bone formation, and has been utilized in clinical bone repair by implantation. In this study, we report a nanoparticulate (NP) system for BMP-2 delivery based on bovine serum albumin (BSA) NPs stabilized with a poly(ethylene glycol) modified polyethylenimine (PEI-PEG) coating. PEI-PEG with different PEG substitutions were synthesized, and the cell viability assay showed PEG substitution greatly reduced the cytotoxicity of the native PEI. Furthermore, PEI-PEG coated BSA NPs demonstrated smaller size and decreased zeta potential compared to PEI-coated NPs. The bioactivity of the encapsulated BMP-2 and the toxicity of PEI-PEG coated NPs were examined by the alkaline phosphatase (ALP) induction assay and the MTT assay, respectively, using human C2C12 cells. The results indicated that BMP-2 remained bioactive in NPs and PEI-PEG coating was advantageous in reducing the NP toxicity as compared to PEI. A 7-day pharmacokinetics study showed the BMP-2 retention in PEI-PEG coated NPs was similar to the uncoated NPs, but lower than that of the PEI-coated NPs. The osteoinductivity of BMP-2 delivered in NPs was determined by subcutaneous implantation in rats, and the results revealed that PEI-PEG coated BSA NPs induced significant de novo bone formation after implantation, while PEI-coated NPs demonstrated much less bone formation. We conclude that BMP-2 delivered by PEGylated PEI-coated BSA NPs displays favorable biocompatibility and promotes new bone formation after implantation.