Although several clinical human islet transplants have been performed, allograft rejection has been a major problem. Encapsulation in sodium alginate/poly-l-lysine has been proposed as a method to protect the islets from rejection and autoimmune destruction. The aims of this project were to determine optimum capsule composition and to assess encapsulated islet function following transplantation using the spontaneously diabetic BioBreeding (BB/d) rat as a model of autoimmune insulin-dependent diabetes. The membrane integrity of islets, determined by microfluorometry, was not adversely affected by encapsulation. During perifusion, the stimulation increase of encapsulated islets was decreased relative to controls, but the stimulation index and response time were unaffected. Capsule composition did not affect these results. The biocompatibility of the capsules was related to their composition. The presence of an outer layer of alginate, and the preparation of alginate used, reduced the severity of pericapsular fibrosis. Capsules implanted in the peritoneal cavity provoked a more severe response than those placed in the renal subcapsular space. BB/d rats displayed a marked response to the capsules. Transplantation experiments demonstrated that 3000 non-encapsulated or 5000 encapsulated islets were the minimum number required to reverse streptozotocin-induced diabetes when transplanted into the peritoneal cavity. An intense pericapsular fibrosis led to failure of the encapsulated grafts. Further transplants into the BB/d rat were postponed to allow the cause of fibrosis to be investigated. The alginate was found to be contaminated with protein and this was removed by dialysis. In vitro experiments with the dialysed alginate demonstrated that treatment of the alginate did not affect the viability of encapsulated islets. Biocompatibility studies showed that capsules coated with dialysed alginate remained free from pericapsular fibrosis, even in the BB/d rat, when tested over the time interval which had resulted in the development of severe fibrosis of capsules coated with untreated alginate.