Mesenchymal stem cells (MSCs) from skeletally mature goats were encapsulated in a photopolymerizing poly(ethylene glycol)-based hydrogel and cultured with or without transforming growth factor beta1 (TGF) to study the potential for chondrogenesis in a hydrogel scaffold system amenable to minimally invasive implantation. Chondrogenic differentiation was evaluated by histological, biochemical, and RNA analyses for the expression of cartilage extracellular matrix components. The two control groups studied were MSCs cultured in monolayer and MSCs encapsulated in the hydrogel and cultured for 6 weeks in chondrogenic medium without TGF-beta1 (6wk-TGF). The three experimental time points for encapsulated cells studied were 0 days (0d), 3 weeks, and 6 weeks in chondrogenic medium with TGF-beta1 at 10 ng/ml (3wk+TGF and 6wk+TGF). MSCs proliferated in the hydrogels with TGF-beta1. Glycosaminoglycan (GAG) and total collagen content of the hydrogels increased to 3.5% dry weight and 5.0% dry weight, respectively, in 6wk+TGF constructs. Immunohistochemistry revealed the presence of aggrecan, link protein, and type II collagen. Upregulation of aggrecan and type II collagen gene expression compared with monolayer MSCs was demonstrated. Type I collagen gene expression decreased from 3 to 6 weeks in the presence of TGF-beta1. 6wk-TGF hydrogels produced no GAG and only moderate amounts of collagen. However, immunohistochemistry and RT-PCR demonstrated a small amount of spontaneous differentiation in this control group. This study demonstrates the ability to encapsulate MSCs to form cartilage-like tissue in vitro in a photopolymerizing hydrogel. This system may be useful for minimally invasive implantation, MSC differentiation, and engineering of composite tissue structures with multiple cellular phenotypes.