Cyclic acetal hydrogels are a novel group of biomaterials which may facilitate osteogenic differentiation of encapsulated bone marrow stromal cells (BMSCs) because of their neutral degradation products. Here, we have incorporated hydroxyapatite nanoparticles within cyclic acetal hydrogels to create cyclic acetal nanocomposites for craniofacial tissue engineering applications. We hypothesized that inclusion of nanosized hydroxyapatite particles within cyclic acetal hydrogels would upregulate osteogenic signal expression of encapsulated BMSCs, due to enhanced cell adhesion, and therefore promote osteodifferentiation. Experimental nanocomposite groups consisted of lower (5 ng/mL) and higher (50 ng/mL) concentrations of nanoparticles. The nanocomposites were characterized by scanning electron microscopy, transmission electron microscopy, and energy dispersive spectroscopy. Swelling parameters of hydrogels in the presence of nanoparticles was studied. Osteoblastic differentiation was characterized by alkaline phosphatase (ALP) and osteocalcin (OC) expression, whereas endogenous osteogenic signal expression was characterized by morphogenetic protein-2 (BMP-2) expression. Finally, immunohistochemistry was performed to detect the presence of OC at the protein level. Results indicated that hydroxyapatite nanoparticles were uniformly distributed throughout the hydrogels and did not affect material properties of the gels. Viability of cells was not affected by nanoparticle concentration, and BMP-2 and OC mRNA expression was enhanced in the presence of nanoparticles. However, a difference in BMP-2, ALP, and OC mRNA expression was not noted between the lower and higher concentrations of nanoparticles. This work demonstrates that inclusion of hydroxyapatite nanoparticles within a cyclic acetal nanocomposite hydrogel may enhance BMSC differentiation by promoting endogenous osteogenic signal expression.