A novel approach for stimulating articular cartilage repair was developed and evaluated in skeletally aged Arcott sheep with signs of early osteoarthritis. Freeze-dried (FD) chitosan formulations were optimized to produce ultraporous cylinders that slowly rehydrate and disperse into bioactive chitosan microparticles in coagulating blood plasma. FD-chitosan implants (80% Degree of Deacetylation, 85 kDa) were produced at 3 doses (initial concentrations of 5, 10, 20 mg/mL, pH 2.5). Full-thickness cartilage defects were created bilaterally in medial femoral condyles of 8–9 year-old sheep (N = 12), microdrilled with 11 holes, then in one knee per sheep, one implant cylinder was inserted into each bleeding drill hole. At 1 day (N = 2), 3 months (N = 5) and 9 months (N = 5) post-operative, repair tissues were analyzed macroscopically and by micro-computed tomography, histology, biochemistry, and mechanics. Chitosan microparticles were detected in day 1 subchondral blood clots and mostly cleared at 3 months. At 3 months, microdrill holes were 2-fold larger, filled with angiogenic granulation tissue, callus, and woven bone, with more chondroinduction in treated versus control drill holes (p = 0.021). At 9 months, biomaterial treatment enhanced bone plate repair and stimulated 68% cartilage resurfacing vs 53% for drill-only controls (p = 0.047). Both treated and control cartilage repair tissues had lower glycosaminoglycan content than intact cartilage and were thinner, stiffer, and more permeable. Upon indentation, hyaline-like repair cartilage showed poroelastic behavior. This study showed that FD-chitosan can be locally delivered to incorporate chitosan microparticles into subchondral bone blood clots and exert anabolic therapeutic effects on articular cartilage resurfacing in aged sheep knees.