Encapsulating pancreatic islets in a semipermeable poly(ethylene glycol) (PEG) hydrogel membrane holds potential as an immuno-isolation barrier for the treatment of type 1 diabetes mellitus. The semipermeable PEG hydrogel not only permits free diffusion of nutrients, metabolic waste, and insulin produced from the encapsulated beta-cells, but also provides a size-exclusion effect to prevent direct contact of entrapped islets to host immune cells and antibodies. However, the use of unmodified PEG hydrogels for islet encapsulation is not ideal, as there is no bioactive cue to promote the long-term survival and function of the encapsulated cells. Herein, we report the synthesis and characterization of a bioactive glucagon-like peptide 1 (GLP-1) analog, namely, GLP-1-cysteine or GLP-1, and the fabrication of functional GLP-1 immobilized PEG hydrogels via a facile thiol-acrylate photopolymerization. The immobilization of bioactive GLP-1C within PEG hydrogels is efficient and does not alter the bulk hydrogel properties. Further, the GLP-1 immobilized PEG hydrogels enhance the Survival and insulin secretion of encapsulated islets. Overall, this study demonstrates a strategy to modify PEG hydrogels with bioactive peptide moieties that can significantly enhance the efficacy of islet encapsulation.