Recombinant human epidermal growth factor (rhEGF) was conjugated with polyethylene glycol (PEG) to improve its physical stability during microencapsulation in biodegradable poly(lactic-co-glycolic acid) microspheres. rhEGF was conjugated with N-hydroxysuccimide (NHS)-derivatized methoxy-PEG (mPEG) of MW 2000 and 5000 under various reaction conditions to optimize the extent of pegylation. Pegylated rhEGF showed much enhanced physical stability against homogenization. Pegylated rhEGF was encapsulated in PLGA microspheres by a double emulsion solvent evaporation method to achieve a sustained release. Pegylated rhEGF exhibited a tri-phasic release profile with a reduced initial burst, compared with unpegylated rhEGF. This study demonstrated that protein pegylation enhanced physical stability of protein and could be a good approach to achieve a sustained protein release profile from biodegradable microspheres.