While designing poly(ethylene glycol) hydrogels with high moduli suitable for in situ placement is attractive for cartilage regeneration, the impact of a tighter crosslinked structure on the organization and deposition of the matrix is not fully understood. The objectives of this study were to characterize the composition and spatial organization of new matrix as a function of gel crosslinking and study its impact on chondrocytes in terms of anabolic and catabolic gene expression and catabolic activity. Bovine articular chondrocytes were encapsulated in hydrogels with three crosslinking densities (compressive moduli 60, 320 and 590 kPa) and cultured for 25 days. Glycosaminoglycan production increased with culture time and was greatest in the gels with lowest crosslinking. Collagens II and VI, aggrecan, link protein and decorin were localized to pericellular regions in all gels, but their presence decreased with increasing gel crosslinking. Collagen II and aggrecan expression were initially up-regulated in gels with higher crosslinking, but increased similarly up to day 15. Matrix metalloproteinase (MMP)-1 and MMP-13 expression were elevated (∼25-fold) in gels with higher crosslinking throughout the study, while MMP-3 was unaffected by gel crosslinking. The presence of aggrecan and collagen degradation products confirmed MMP activity. These findings indicate that chondrocytes synthesized the major cartilage components within PEG hydrogels, however, gel structure had a significant impact on the composition and spatial organization of the new tissue and on how chondrocytes responded to their environment, particularly with respect to their catabolic expression.