Islet transplantation is a promising therapy for insulin-dependent diabetes but large-scale application is hampered by the lack of a consistent source of insulin-producing cells and need for life-long administration of immunosuppressive drugs, which are associated with severe side effects. To avoid chronic immunosuppression, islet grafts can be enveloped in immunoisolating polymeric membranes. These immunoisolating polymeric membranes protect islet grafts from cell-mediated rejection while allowing diffusion of oxygen, nutrients, and insulin. Although clinical trials have shown safety and feasibility of encapsulated islets to control glucose homeostasis, the strategy does up till now not support long-term graft survival. This partly can be explained by significant loss of insulin producing cells in the immediate period after implantation. The loss can be prevented with combining immunoisolation with immunomodulation, such as combined administration of immunomodulating cytokines or co-encapsulation of immunomodulating cell-types such as regulatory T cells, mesenchymal stem cells/their products or Sertoli cells. Also, administration of specific antibodies or apoptotic donor-leucocytes are considered to create a tolerant microenvironment around immunoisolated grafts. In this review, we describe the outcomes and limitations of these approaches, as well as recent progress in immunoisolating devices.