Pluripotent stem cell (PSC)-derived retinal sheet transplanted in vivo can form structured photoreceptor layers, contact with host bipolar cells, and transmit light signals to host retinas. However, a major concern is the presence of graft bipolar cells that may impede host-graft interaction. In this study, we used human ESC-retinas with the deletion of Islet-1 (ISL1) gene to achieve the reduced graft ON-bipolar cells after xenotransplantation into end-stage retinal degeneration model rats. Compared with wild-type graft, ISL1^−/− hESC-retinas showed better host-graft contact, with indication of host-graft synapse formation and significant restoration of light responsiveness in host ganglion cells. We further analyzed to find out that improved functional integration of ISL1^−/− hESC-retinas seemed attributed by a better host-graft contact and a better preservation of host inner retina. ISL1^−/− hESC-retinas are promising for the efficient reconstruction of a degenerated retinal network in future clinical application.