When using hydrogel scaffolds for cartilage tissue engineering, two gel properties are particularly important: the equilibrium water content (q, equilibrium swelling ratio) and the compressive modulus, K. In this work, chondrocytes were photoencapsulated in degrading and nondegrading poly(ethylene glycol)‐based hydrogels to assess extracellular matrix (ECM) formation as a function of these gel properties. In nondegrading gels, the glycosaminoglycan (GAG) content was not significantly different in gels when q was varied from 4.2 to 9.3 after 2 and 4 weeks in vitro. However, gels with a q of 9.3 allowed GAGs to diffuse throughout the gels homogenously, but a q ≤ 5.2 resulted in localization of GAGs pericellularly. Interestingly, in the moderately crosslinked gels with a K of 360 kPa, an increase in type II collagen synthesis was observed compared with gels with a higher (960 kPa) and lower (30 kPa) K after 4 weeks. With the incorporation of degradable linkages into the network, gel properties with an initially high K (350 kPa) and final high q (7.9) were obtained, which allowed for increased type II collagen synthesis coupled with a homogenous distribution of GAGs. Thus, a critical balance exists between gel swelling, mechanics, and degradation in forming a functional ECM. © 2001 Wiley Periodicals, Inc. J Biomed Mater Res 59: 63–72, 2002