Emerging biotechnologies, such as the use of biohybrid devices for cellular therapies, are showing increasing therapeutic promise for the treatment of various diseases, including type 1 diabetes mellitus. The functionality of such devices could be greatly enhanced if successful localized immunosuppression regimens could be established, since they would eliminate the many otherwise unavoidable side effects of currently used systemic immunosuppressive therapies. The existence of local immune privilege at some specialized tissues, such as the eye, CNS, or pregnant uterus, supports the feasibility of localized immunomodulation, and such an approach is particularly well-suited for cell transplant therapies where all transplanted tissue is localized within a device. Following the success of syngeneic transplantation in a subcutaneous prevascularized device as a bioartificial pancreas in a rodent model, we now report the first results of exploratory in vivo islet allograft studies in rats using locally delivered glucocorticoids (dexamethasone phosphate and the soft steroid loteprednol etabonate). Following in vitro assessments, in silico drug distribution models were used to establish tentative therapeutic dose ranges. Sustained local delivery was achieved via implantable osmotic mini-pumps through a central sprinkler, as well as with a sustained-delivery formulation for loteprednol etabonate using poly(D,L-lactic) acid (PLA) microspheres. Doses delivered locally were approximately hundred-fold smaller than those typically used in systemic treatments. While several solubility, stability, and implantation problems still remain to be addressed, both compounds showed promise in their ability to prolong graft survival after tapering of systemic immunosuppression, compared to control groups.