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An alternative approach to gene therapy via non-autologous somatic gene therapy is to implant genetically-engineered cells protected from immune rejection with microcapsules to deliver a therapeutic gene product. This delivery system may be optimized by using myoblast cell lines which can undergo terminal differentiation into myotubes, thus removing the potential problems of tumorigenesis and space restriction. However, once encapsulated, myoblasts do not proliferate or differentiate well. We now report the use of extracellular matrix components and growth factors to improve these properties. Addition of matrix material collagen, merosin or laminin all stimulated myoblast proliferation, particularly when merosin and laminin were combined; however, none, except collagen, stimulated differentiation. Inclusion of basic fibroblast growth factor (bFGF) within the microcapsules in the presence of collagen stimulated proliferation of C2C12 myoblasts, as well as differentiation into myotubes. Inclusion of insulin growth factor (IGF-II) in the microcapsules had no effect on proliferation but accelerated myoblasts differentiation. When the above matrix material and growth factors were provided in combination, the use of merosin and laminin together with bFGF and IGF-II stimulated myoblast proliferation but had no effect on differentiation. In contrast, the cocktail containing bFGF, IGF-II and collagen induced increased myoblasts proliferation and subsequent differentiation. Hence, the combination of bFGF, IGF-II and collagen appears optimal in improving proliferation and differentiation in encapsulated myoblasts.