A new capsule for the encapsulation and transplantation of pancreatic islets has been developed. Five active ingredients are involved in the capsule formation process: high viscosity sodium alginate (SA-HV), cellulose sulfate (CS), poly(methylene-co-guanidine) hydrochloride (PMCG), calcium chloride, and sodium chloride. Complexation reaction exhibits several unique features: (1) solution of SA-HV with CS represents a physical mixture of two entangled polyanions that provide both pH-sensitive (carboxylic) and permanently charged (sulfate) groups; (2) presence of CaCl2 in the cation solution ensures formation of the gelled bead after the drop of polyanion solution is immersed in the cation solution; (3) character of the polycation (PMCG), i.e., low molecular weight and unusually high charge density, combines both high mobility and reactivity; (4) presence of PMCG in cation solution, together with CaCl2, gives rise to the competitive binding of these two cations based on their diffusion and affinity towards the anion groups; and (5) NaCl provides the anti-gelling sodium ions that significantly affect the reaction of CaCl2 with the polyanion matrix, thus altering the final properties of the capsule surface, shape, and permeability. The capsule size, mechanical strength, membrane thickness, and permeability can be precisely adjusted and quantified. Detailed information on the permeability aspects is given in another paper by Brissová et al. [J. Biomed. Mater. Sci., 39, 61 (1998)]. The new features concerning capsule processing and testing are presented. We believe that the capsule characteristics can be optimized in the next step to meet the biological criteria. The initial transplantation results suggest that this capsule is biocompatible and noncytotoxic and is a promising candidate for the immunoisolation of cells such as pancreatic islets.