Microencapsulation of cells in a polymer membrane [e.g., poly(hydroxyethyl methacrylate-co-methyl methacrylate) (HEMA-MMA)] has been proposed as a vehicle for the delivery of therapeutic biomolecules, but cells (especially xenogeneic cells) survive only for short times, limiting the utility of this approach. Murine interleukin-10 (mIL-10) has been shown to downregulate the xenogeneic immune response, and we tested the hypothesis that mIL-10 produced by microencapsulated Chinese hamster ovary (CHO) cells would modulate the transplant-site environment leading to prolonged cell function in a xenogeneic model without other immunomodulatory agents. Prior to encapsulation, CHO cells were genetically engineered to express mIL-10 and a firefly bioluminescence protein, luciferase, which allowed for noninvasive tracking of transplanted cells in vivo with the Xenogen IVIS Imaging System. This nondestructive imaging system was sufficiently sensitive to detect photon signal emitted by a single capsule containing around 800 luciferase-transduced CHO (CHO(LUC)) cells in vitro, and to track changes in luciferase expression in vivo over time. Effective modulation of the transplantation-site environment with mIL-10 secreted from capsules was evident by greater luciferase expression at 10 and 21 days after transplantation relative to encapsulated luciferase-transfected cells that did not produce mIL-10. Longer duration effects require further investigation to extend this proof-of-concept study.