Graft survival and integration are major factors that limit the efficacy of cell therapies for the treatment of disease and injury in the central nervous system. Efforts to improve cell survival and integration have focused in part on the development of biocompatible scaffolds that support neural cell growth and function. Here we photoencapsulate neural cells within degradable hydrogels and use confocal microscopy to non-invasively monitor these key cell functions over time. By directly imaging fluorescently labeled cells we show that neural cells cultured within three-dimensional polymer networks create their own cellular microenvironment to survive, proliferate and differentiate and form neurons and glia that are electrophysiologically responsive to neurotransmitter. By changing the degradation rate of the polymer network, the time-scale over which neural cells extend processes throughout the hydrogel could be tuned on a time-scale that ranged from 1-3 weeks. These studies were carried out in the absence of serum and extracellular matrix molecules that can be immunogenic and identify degradable PEG hydrogels as suitable synthetic cell carriers for neural transplantation.