Therapeutic cells encapsulated in immunobarrier devices have promise for treatment of a variety of human diseases without immunosuppression. The absence of sufficient oxygen supply to maintain viability and function of encapsulated tissue has been the most critical impediment to progress. Within the framework of oxygen supply limitations, we review the major issues related to development of these devices, primarily in the context of encapsulated islets of Langerhans for treating diabetes, including device designs and materials, supply of tissue, protection from immune rejection, and maintenance of cell viability and function. We describe various defensive measures investigated to enhance survival of transplanted tissue, and we review the diverse approaches to enhancement of oxygen transport to encapsulated tissue, including manipulation of diffusion distances and oxygen permeability of materials, induction of neovascularization with angiogenic factors and vascularizing membranes, and methods for increasing the oxygen concentration adjacent to encapsulated tissue so as to exceed that in the microvasculature. Recent developments, particularly in this latter area, suggest that the field is ready for clinical trials of encapsulated therapeutic cells to treat diabetes.