Cytosine deaminase (CD) catalyses the enzymatic conversion of the non-toxic prodrug 5-fluorocytosine (5-FC) to the potent chemotherapeutic form, 5-fluorouracil (5-FU). Intratumoral delivery of CD localises chemotherapy dose while reducing systemic toxicity. Encapsulation in biocompatible microcapsules immunoisolates CD and protects it from degradation. We report on the effect of alginate encapsulation on the catalytic and functional activity of isolated CD and recombinant E. coli engineered to express CD (E. coli(CD)). Alginate microcapsules containing either CD or Escherichia coli(CD) were prepared using ionotropic gelation. Conversion of 5-FC to 5-FU was quantitated in unencapsulated and encapsulated CD/E. coli(CD) using spectrophotometry, with a slower rate of conversion observed following encapsulation. Both encapsulated CD/5-FC and E. coli(CD)/5-FC resulted in cell kill and reduced proliferation of 9L rat glioma cells, which was comparable to direct 5-FU treatment. Our results show that encapsulation preserves the therapeutic potential of CD and E. coli(CD) is equally effective for enzyme-prodrug therapy.