Islet transplantation is currently in clinical use as a treatment for type I diabetes, but donor shortages and long‐term immunosuppression limit broad application. Alginate microcapsules coated with poly‐l‐ornithine can be used to encapsulate islets in an environment that allows diffusion of glucose, insulin, nutrients, and waste products while inhibiting cells and antibodies. While clinical trials are ongoing using islets encapsulated in alginate microbeads, there are concerns in regards to long‐term stability. Evaluation of the local tissue response following implantation provides insight into the underlying mechanisms contributing to biomaterial failure, which can be used to the design of new material strategies. Macrophages play an important role in driving the response. In this study, the stability of alginate microbeads coated with PLO containing islets transplanted in the omentum pouch model was investigated. Biomaterial structure and the inflammatory response were characterized by X‐ray phase contrast (XPC) μCT imaging, histology, and immunostaining. XPC allowed evaluation of microbead 3D structure and identification of failed and stable microbeads. A robust inflammatory response characterized by high cell density and the presence of pro‐inflammatory macrophages was found around the failed grafts. The results obtained provide insight into the local tissue response and possible failure mechanisms for alginate microbeads. © 2016 Wiley Periodicals, Inc. J Biomed Mater Res Part A: 104A: 1581–1590, 2016.