Encapsulated viable cells for implanting are prepared having cells dispersed in a particulate, essentially non cross-linked chitosan core matrix that is enclosed within a semipermeable membrane. The cells are entrapped between chitosan particles of the core matrix and there is essentially no interfacial cross-linking between the core matrix and the membrane. The core matrix provides a physical support for the cells such that the cells are evenly dispersed throughout the core matrix so as to allow their maintenance, growth, proliferation and differentiation. The encapsulated cells may be prepared by mixing viable cells with a solution of chitosan, encapsulating the resultant mixture in a thermoplastic semipermeable membrane, and causing the chitosan to precipitate such as by changing the pH to form the core matrix. Alternatively, the chitosan in solution is precipitated to form the core matrix containing cells, and the core matrix is encapsulated in a semipermeable membrane. Cells encapsulated include neurosecretory cell lines, .beta.-cell-derived cells lines, fibroblasts, myocytes and glial cells.