The emergence of hepatocyte based clinical and pharmaceutical technologies, has been limited by the absence of a stable hepatocyte cell source. Embryonic stem cells may represent a potential solution to this cell source limitation problem since they are highly proliferative, renewable, and pluripotent. Although many investigators have described techniques to effectively differentiate stem cells into a variety of mature cell lineages, their practicality is limited by: (1) low yields of fully differentiated cells, (2) absence of large scale processing considerations, and (3) ineffective downstream enrichment protocols. Thus, a differentiation platform that may be modified to induce and sustain differentiated cell function and scaled to increase differentiated cell yield would improve current stem cell differentiation strategies. Microencapsulation provides a vehicle for the discrete control of key cell culture parameters such as the diffusion of growth factors, metabolites, and wastes. In addition, both cell seeding density and bead composition may be manipulated. In order to assess the feasibility of directing stem cell differentiation via microenvironment regulation, we have developed a murine embryonic stem cell (ES) alginate poly-L-lysine microencapsulation hepatocyte differentiation system. Our results indicate that the alginate microenvironment maintains cell viability, is conducive to ES cell differentiation, and maintains differentiated cellular function. This system may ultimately assist in developing scalable stem cell differentiation strategies. (c) 2005 Wiley Periodicals, Inc.