During the last 25 years, display techniques such as phage display have become very powerful tools for protein engineering, especially for the selection of monoclonal antibodies. However, while this method is extremely efficient for affinity-based selections, its use for the selection and directed evolution of enzymes is still very restricted. Furthermore, phage display is not suited for the engineering of mammalian proteins that require posttranslational modifications such as glycosylation or membrane anchoring. To circumvent these limitations, we have developed a system in which structurally complex mammalian enzymes are displayed on the surface of retroviruses and encapsulated into droplets of a water-in-oil emulsion. These droplets are made and manipulated using microfluidic devices and each droplet serves as an independent reaction vessel. Compartmentalization of single retroviral particles in droplets allows efficient coupling of genotype and phenotype. Using tissue plasminogen activator (tPA) as a model enzyme, we show that, by monitoring the enzymatic reaction in each droplet (by fluorescence), quantitative measurement of tPA activity in the presence of different concentrations of the endogenous inhibitor PAI-1 can be made on-chip. On-chip fluorescence-activated droplet sorting allowed the processing of 500 samples per second and the specific collection of retroviruses displaying active wild-type tPA from a model library with a 1000-fold excess of retroviruses displaying a non-active control enzyme. During a single selection cycle, a more than 1300-fold enrichment of the active wild-type enzyme was demonstrated.