The synergy of some promising advances in the fields of cell therapy and biomaterials together with improvements in the fabrication of more refined and tailored microcapsules for drug delivery have triggered the progress of cell encapsulation technology. Cell microencapsulation involves immobilizing the transplanted cells within a biocompatible scaffold surrounded by a membrane in attempt to isolate the cells from the host immune attack and enhance or prolong their function in vivo. This technology represents one strategy which aims to overcome the present difficulties related to local and systemic controlled release of drugs and growth factors as well as to organ graft rejection and thus the requirements for use of immunomodulatory protocols or immunosuppressive drugs. This chapter gives an overview of the current situation of cell encapsulation technology as a controlled drug delivery system, and the essential requirements of the technology, some of the therapeutic applications, the challenges, and the future directions under investigation are highlighted.