Osteoarthritis (OA) is a degenerative condition that involves the production of inflammatory cytokines (e.g., interleukin-1 beta (IL-1 beta), tumour necrosis factor-alpha (TNF-alpha) and interleukin-6 (IL-6)) that stimulate degradative enzymes, matrix metalloproteinases (MMPs) and aggrecanases (ADAMTS) resulting in articular cartilage breakdown. The presence of interleukin-1 beta (IL-1 beta) is one reason for poor clinical outcomes in current cell-based tissue engineering strategies for treating focal early osteoarthritic defects. Mesenchymal stem cells (MSCs) are a potential cell source for articular cartilage regeneration, although IL-1 beta has been shown to inhibit in vitro chondrogenesis. In vivo, articular chondrocytes reside under a low oxygen environment between 2-5% oxygen (physioxia) and have been shown to enhance in vitro MSC chondrogenic matrix content with reduced hypertrophic marker expression under these conditions. The present investigation sought to understand the effect of physioxia on IL-1 beta inhibited MSC chondrogenesis. MSCs expanded under physioxic (2% oxygen) and hyperoxic (20%) conditions, then chondrogenically differentiated as pellets in the presence of TGF-beta 1 and either 0.1 or 0.5 ng/mL IL-1 beta. Results showed that there were donor variations in response to physioxic culture based on intrinsic GAG content under hyperoxia. In physioxia responsive donors, MSC chondrogenesis significantly increased GAG and collagen II content, whilst hypertrophic markers were reduced compared with hyperoxia. In the presence of IL-1 beta, these donors showed a significant increase in cartilage matrix gene expression and GAG content relative to hyperoxic conditions. In contrast, a set of MSC donors were unresponsive to physioxia and showed no significant increase in matrix production independent of IL-1 beta presence. Thus, physioxia has a beneficial effect on MSC cartilage matrix production in responsive donors with or without IL-1 beta application. The mechanisms controlling the MSC chondrogenic response in both physioxia responsive and unresponsive donors are to be elucidated in future investigations.