To determine the in vitro function of microencapsulated hepatocytes, viable hepatocytes were isolated from rats and encapsulated within biocompatible alginatepolylysine membranes for in vitro studies. Urea formation, prothrombin and cholinesterase activity, the incorporation of tritiated leucine into intracellular proteins and the immunolocation of synthesized albumin were monitored in culture. Despite a decrease in some of these activities, the cultured hepatocytes continued to function throughout the 5-week observation period, producing and excreting urea, prothrombin and cholinesterase activity into the medium. In addition, albumin could be demonstrated within encapsulated hepatocytes for up to 5 weeks. Scanning and transmission electron microscopy showed the cells to be embedded within the alginate matrix and to retain a globular shape.