The use of microencapsulation with alginate-poly-l-lysine (PLL) as the encapsulation material has been hampered by overgrowth of collagen around implanted capsules. Studies have shown that poly(ethylene glycol) (PEG) has higher biocompatibility than PLL. In this project, we examined the biocompatibility of PEG in comparison with PLL in the Lewis rat model. Capsules made from either PEG or PLL were implanted into Lewis rats in three anatomical sites: subcutaneous (SC), intramuscular (IM), and intra-epididymis (IE). After 2 or 4 weeks, capsules were retrieved, sectioned, and stained with Sirius Red for analysis of fibrotic overgrowth with ImageJ software. The results were statistically analyzed using either unpaired t test or analysis of variance (ANOVA). PEG demonstrated significantly better biocompatibility in SC, at both 2 and 4 weeks, and IE at 2 weeks (p < 0.0001). No significant differences were found in IM implantation at either time point (p = 0.36) between the two materials. However, there was significantly heavier fibrotic overgrowth around PEG capsules in IE than PLL capsules at 4 weeks (p < 0.01). When compared among the anatomical sites, IM implantation demonstrated significantly less fibrotic overgrowth than other sites for both materials (p < 0.01). In conclusion, PLL and PEG may induce different levels of fibrosis based on anatomical location and duration of implantation.