Stem cell-based therapies have shown promise in enhancing repair of bone and cartilage. Marrow-derived mesenchymal stem cells (MSC) are typically expanded in vitro to increase cell number, but this process is lengthy, costly, and there is a risk of contamination and altered cellular properties. Potential advantages of using fresh uncultured bone marrow mononuclear cells (BMMC) include heterotypic cell and paracrine interactions between MSC and other marrow-derived cells including hematopoietic, endothelial, and other progenitor cells. In the present study, we compared the osteogenic and chondrogenic potential of freshly isolated BMMC to that of cultured-expanded MSC, when encapsulated in three-dimensional (3D) collagen-chitosan microbeads. The effect of low and high oxygen tension on cell function and differentiation into orthopedic lineages was also examined. Freshly isolated rat BMMC (25 · 10 6 cells/mL, containing an estimated 5 · 10 4 MSC/mL) or purified and culture-expanded rat bone marrow-derived MSC (2 · 10 5 cells/mL) were added to a 65-35 wt% collagenchitosan hydrogel mixture and fabricated into 3D microbeads by emulsification and thermal gelation. Microbeads were cultured in control MSC growth media in either 20% O 2 (normoxia) or 5% O 2 (hypoxia) for an initial 3 days, and then in control, osteogenic, or chondrogenic media for an additional 21 days. Microbead preparations were evaluated for viability, total DNA content, calcium deposition, and osteocalcin and sulfated glycosaminoglycan expression, and they were examined histologically. Hypoxia enhanced initial progenitor cell survival in fresh BMMC-microbeads, but it did not enhance osteogenic potential. Fresh uncultured BMMCmicrobeads showed a similar degree of osteogenesis as culture-expanded MSC-microbeads, even though they initially contained only 1/10th the number of MSC. Chondrogenic differentiation was not strongly supported in any of the microbead formulations. This study demonstrates the microbead-based approach to culturing and delivering cells for tissue regeneration, and suggests that fresh BMMC may be an alternative to using cultureexpanded MSC for bone tissue engineering.