Microencapsulation of genetically engineered cells may have important applications as delivery systems for therapeutic proteins. However, optimization of the microcapsules with regard to mechanical stability, cell growth, and secretion of proteins is necessary in order to evaluate the future use of this delivery technology. We have explored the growth, survival, and secretion of therapeutic proteins from 293-EBNA cells producing endostatin (293 endo cells) and JJN3 myeloma cells producing hepatocyte growth factor (HGF) that have been embedded in various types of alginate capsules. Parameters that affect capsule integrity such as homogenous and inhomogenous gel cores and addition of an outer poly-L-lysine (PLL)-alginate coating were evaluated in relation to cell functions. When cells were encapsulated, the PLL layer was found to be absolutely required for the capsule integrity. The JJN3 and 293 endo cells displayed completely different growth and distribution patterns of live and dead cells within the microcapsules, as shown by 3D pictures reconstructed from images taken with confocal laser scanning microscopy (CLSM). Encapsulated JJN3 cells showed a bell-shaped growth and HGF secretion curve over a time period of 5 months. The 293 endo cells reached a plateau phase in growth after 23 days postencapsulation; however, after around 30 days a fraction of the microcapsules started to disintegrate. Microcapsule disintegration occurred with time irrespective of capsule and cell type, showing that alginate microcapsules possessing relatively high gel strength are not strong enough to keep proliferating cells within the microcapsules for prolonged time periods. Although this study shows that the stability of an alginate-based cell factory can be increased by a PLL-alginate coating, further improvement is necessary with regard to capsule integrity as well as controlling the cell growth before this technology can be used for therapy.