Loss of bone and cartilage are major healthcare issues. At present, there is a paucity of therapies for effectively repairing these tissues sustainably in the long term. A tissue engineering approach using advanced functional scaffolds may provide a clinically acceptable alternative. In this study, an innovative mineralized alginate/chitosan scaffold was used to provide tailored microenvironments for driving chondrogenesis and osteogenesis from single and mixed populations of human articular chondrocytes and human bone marrow stromal cells. Polysaccharide capsules were prepared with combinations of these cell types with the addition of type I or type II collagen to augment cell-matrix interactions and promote the formation of phenotypically distinct tissues and placed in a rotating (Synthecon) bioreactor or held in static 2D culture conditions for up to 28 days. Significant cell-generated matrix synthesis was observed in human bone marrow bioreactor samples containing type I collagen after 21-28 days, with increased cell proliferation, cell activity and osteocalcin synthesis. The cell-generated matrix was immuno-positive for types I and II collagen, bone sialoprotein and type X collagen, a marker of chondrogenic hypertrophy, demonstrating the formation of a mature chondrogenic phenotype with areas of new osteoid tissue formation. We present a unique approach using alginate/collagen capsules encapsulated in chitosan to promote chondrogenic and osteogenic differentiation and extracellular matrix formation and the potential for tissue-specific differentiation. This has significant implications for skeletal regeneration and application.