In this study, we evaluated the effects of exendin-4 on free and encapsulated islet grafts in a rodent model. We also investigated the role of a transcription factor, hypoxia-inducible factor-1 (HIF-1), in mediating the beneficial effects of exendin-4. Diabetic athymic mice were transplanted with free rat islets under the kidney capsule or with macroencapsulated rat islets SC with or without exendin-4, islet preculture (exendin-4 0.1 nM for 20 h), and/or recipient treatment (IP 100 ng/day, day 0-7). The mice were followed for 4 weeks and the graft function and β-cell volume were evaluated. The effects of exendin-4 on islet HIF-1α mRNA and protein expression and on ATP content in a rat insulinoma cell line (INS-1E) were also examined. Preculture with exendin-4 followed by recipient treatment improved the outcome of both free (73% graft function vs. 26% in controls, p = 0.03) and macroencapsulated islet grafts (100% vs. 25% in controls, p = 0.02). In macroencapsulated grafts, the exendin-4-treated group had significantly larger endocrine volume, less graft necrosis, and more blood vessels around the capsule. In rat islets cultured with exendin-4, HIF-1α mRNA and protein expression were significantly enhanced. ATP content was increased in exendin-4-treated INS-1E cells under hypoxic conditions. The improved functional outcome after transplantation of a marginal islet mass with a brief initial treatment with exendin-4 is related to a larger surviving endocrine cell volume. Exendin-4 may improve islet graft resistance to hypoxia during the peritransplant period by increasing the expression of HIF-1α.