The current study investigates the potential of chitosan-hyaluronic acid dialdehyde hydrogels for in vivo cartilage regeneration following two different approaches: Gel alone for cartilage regeneration or combination of chondrocytes and gel for cartilage repair. Critical size osteochondral defects were created in knee joints of Newzealand White rabbits. Allogenic rabbit chondrocytes were encapsulated in hydrogels and gel or gel+cells were implanted in defects aseptically. The regenerated cartilage was analyzed after 12 weeks of implantation. The morphological scoring indicates that repair tissue was formed in all the animals by 12 weeks irrespective of whether they were sham, received gel, or gel with cells as implant. However the repair tissue formed in sham appeared fibrous and opaque, where as those that received gel had texture similar to the surrounding native cartilage and animals with gel+cells showed varied response. Histology staining, score distribution and immunostaining for collagen Type II showed animals that received gel alone as the implant had a mixture of hyaline and fibro cartilage. The animals with cell encapsulated gels had more fibrous cells with weak staining for collagen type II. There was no significant enhancement in the quality of regenerated cartilage in presence of encapsulated chondrocytes.