Dermis isolated adult stem (DIAS) cells, a subpopulation of dermis cells capable of chondrogenic differentiation in the presence of cartilage extracellular matrix, are a promising source of autologous cells for tissue engineering. Hypoxia, through known mechanisms, has profound effects on in vitro chondrogenesis of mesenchymal stem cells and could be used to improve the expansion and differentiation processes for DIAS cells. The objective of this study was to build upon the mechanistic knowledge of hypoxia and translate it to tissue engineering applications to enhance chondrogenic differentiation of DIAS cells through exposure to hypoxic conditions (5% O2) during expansion and/or differentiation. DIAS cells were isolated and expanded in hypoxic (5% O2) or normoxic (20% O2) conditions, then differentiated for 2 weeks in micromass culture on chondroitin sulfate-coated surfaces in both environments. Monolayer cells were examined for proliferation rate and colony forming efficiency. Micromasses were assessed for cellular, biochemical, and histological properties. Differentiation in hypoxic conditions following normoxic expansion increased per cell production of collagen type II 2.3 fold and glycosaminoglycans 1.2 fold relative to continuous normoxic culture (p<0.0001). Groups expanded in hypoxia produced 51% more collagen and 23% more GAGs than those expanded in normoxia (p<0.0001). Hypoxia also limited cell proliferation in monolayer and in 3D culture. Collectively, these data show hypoxic differentiation following normoxic expansion significantly enhances chondrogenic differentiation of DIAS cells, improving the potential utility of these cells for cartilage engineering.