Mechanical stability, complete encapsulation, selective permeability, and suitable extra-cellular microenvironment, are the major considerations in designing microcapsules for cell encapsulation. We have developed four types of multi-layered microcapsules that allow selective optimization of these parameters. Primary hepatocytes were used as model cells to test these different microcapsule configurations. Type-1 microcapsules with an average diameter of 400 microm were formed by complexing modified collagen with a ter-polymer shell of 2-hydroxyethyl methylacrylate (HEMA), methacrylic acid (MAA) and methyl methacrylate (MMA), resulting in a capsule thickness of 2-5 microm. Cells in these microcapsules exhibited improved cellular functions over those cultured on collagen monolayers. Type-II microcapsules were formed by encapsulating the Type-I microcapsules in another 2-5 microm ter-polymer shell and a approximately 5 microm collagen layer between the two ter-polymer shells to ensure complete cell encapsulation. Type-II microcapsules comprised of a macro-porous exoskeleton with materials such as alumina sol-gel coated on the Type-I microcapsules. Nano-indendation assay indicated an improved mechanical stability over the Type-I microcapsules. Type-IV microcapsules were created by encapsulating Type-III microcapsules in another 2-5 microm ter-polymer shell, with the aim of imparting a negatively charged smooth surface to minimize plasma protein absorption and ensure complete cell encapsulation. The permeability for nutrient exchange, cellular functions in terms of urea production and mechanical stability of the microcapsules were characterized. The advantages and limitations of these microcapsules for tissue engineering are discussed.