Vascular endothelial growth factor (VEGF) and dexamethasone (DX) release from hydrogel coatings were examined as a means to modify tissue inflammation and induce angiogenesis. Antibiofouling hydrogels for implantable glucose sensor coatings were prepared from 2-hydroxyethyl methacrylate, N-vinyl pyrrolidinone, and polyethylene glycol. Microdialysis sampling was used to test the effect of the hydrogel coating on glucose recovery. VEGF-releasing hydrogel-coated fibers increased vascularity and inflammation in the surrounding tissue after 2 weeks of implantation compared to hydrogel-coated fibers. DX-releasing hydrogel-coated fibers reduced inflammation compared to hydrogel-coated fibers and had reduced capsule vascularity compared to VEGF-releasing hydrogel-coated fibers. Hydrogels that released both VEGF and DX simultaneously also showed reduced inflammation at 2 weeks implantation; however, no enhanced vessel formation was observed indicating that the DX diminished the VEGF effect. At 6 weeks, there were no detectable differences between drug-releasing hydrogel-coated fibers and control fibers. From this study, hydrogel drug release affected initial events of the foreign body response with DX inhibiting VEGF, but once the drug depot was exhausted these effects disappeared.