The efficacy of pancreatic islet transplants in correcting hyperglycemia and slowing the progression of complications in diabetics has been confirmed by many experimental and clinical studies. Unfortunately, the availability of human islets is extremely limited and, therefore, treatment of large numbers of human diabetic patients will almost certainly require either the use of islets harvested from animals (xenografts) or the use of insulin-secreting genetically modified cells of either human or animal origin. There is currently no effective regimen which will allow long-term survival of xenogeneic islets from widely unrelated donor-recipient combinations, such as pig-to-rodent, pig-to-dog, or pig-to-primate. There is considerable interest in the development of immunoisolation techniques for protection of donor islets. However, most materials used in immunoisolation devices are relatively bio-incompatible. Poly-L-lysine-alginate microcapsules are biocompatible and provide an optimal geometry for transmembrane diffusion of insulin and nutrients. Microcapsules allow long-term survival of xenogeneic islets in diabetic rodents or dogs with induced diabetes. However, mice and rats with spontaneous diabetes destroy encapsulated islet grafts within 2 to 3 weeks. Biopsies reveal large numbers of macrophages, immunoglobulins and limited numbers of helper and cytotoxic T-cells in the peri-microcapsule environment of the peritoneal cavity. Cytokines have been identified in peritoneal fluid from mice with islet grafts and may play a role in encapsulated islet destruction. Targeted immunomodulation by treatment of recipients with either anti-helper T-cell antibodies, or fusion proteins which block costimulatory interactions between antigen presenting cells and host T-cells have demonstrated synergy in significant prolongation of encapsulated islet xenograft survival in NOD mice with spontaneous diabetes. Technical improvements in microcapsule design also have contributed to prolonged graft survival. "Double-wall" microencapsulation provides a more durable microcapsule and islet pretreatment prior to encapsulation reduces the frequency of defective capsules with islets entrapped in the membrane. Long-term durability of encapsulated islet grafts remains a concern and further improvements in microcapsule design are a prerequisite to clinical trials.