Healthy rat islets were encapsulated in alginate-polylysine-alginate capsules measuring 0.25–0.35 mm in diameter using a modified encapsulation technique. The encapsulated islets were transplanted intraperitoneally in nonimmunosuppressed streptozotocin-induced diabetic BALB/c mice. The diabetic condition of the experimental animals was reversed within two days following the transplantation and the animals remained normoglycemic for up to 308 days, with a mean xenograft survival of 219.8 ± 46.2 days. Four and six months posttransplant the capsules were removed from two recipients. This resulted in regression to a hyperglycemic state. After a second transplant of encapsulated islets, the animals returned to normoglycemia. In control mice that received free unencapsulated islets, the xenografts remained functional for no more than 12 days. Our study clearly demonstrates that the encapsulation of islets in the new smaller capsules can effectively prolong xenograft survival without immunosuppression.