Aims/hypothesis. Survival of microencapsulated islet grafts is limited, even when inflammatory reactions against the capsules are restricted to a small portion of less than 10%. Methods. This study investigates both in vivo in rat recipients and in vitro whether cellular overgrowth on this minority of the capsules contributes to limitations in the functional survival of the 90% of the encapsulated islets which remain free of any cellular overgrowth. Results. In successful rat recipients of an allogenic microencapsulated islet graft we found that the vast majority of cells in the capsular overgrowth were activated ED-1 and ED-2 positive macrophages which were found in numbers of approximately 1500 per capsule. Co-culture of encapsulated islets with 1500 (nr8383) rat-macrophages per capsule showed that the activation of macrophages was caused by islet-derived bioactive factors since TNF-α and IL-1β secretion by macrophages was induced by islet-containing capsules and not by empty capsules. This activation of macrophages was associated with a decrease in function of the encapsulated islets as evidenced by a quantitatively reduced (35%) insulin response in static incubation and a slower response in perifusion. Conclusion/interpretation. Present research aims to design strategies for the temporary inhibition of macrophage activation since macrophages are predominantly present in the first two months after implantation. These strategies will serve as a pertinent basis for future clinical application of microencapsulated islets. [Diabetologia (2003) 46:666-673]