The effect of water-miscible cosolvents on biotransformations of poorly water-soluble substrates by immobilized cells was investigated, using Δ1-dehydrogenation of hydrocortisone by Arthrobacter simplex as a model. Criteria for solvent selection on the basis of retention of enzymic activity were postulated and tested. Diols were considered to be the most suitable group of solvents. Substrate solubility increased tenfold in 30% (v/v) ethylene glycol, but reaction rates were significantly slower in such solutions. This was mainly caused by a decrease of oxygen solubility in the presence of the cosolvent and conformational changes imposed on the intracellular enzyme by cosolvent molecules penetrating the cell. The inhibition could be eliminated by the addition of an artificial electron acceptor, phenazine methosulphate (PMS). Reaction rates faster than those for substrate suspensions (no cosolvent added) could thus be achieved. Immobilization of Arthrobacter simplex in cross-linked polyacrylamide hydrazide gave high retentions of activity. PMS exhibited toxic effects on the entrapped cells, leading to reduced activity after extended use.