Microcapsules containing pigment and polymer were prepared by dispersing a viscous mixture of pigment, core monomers, initiators and oil-soluble shell monomer in an aqueous solution of surfactants, forming oil-in-water droplets. Subsequently, a water-soluble shell monomer was added to these droplets, encapsulating them via interfacial (IF) polycondensation. These microcapsules were then heated for free radical (FR) polymerization of the core monomers. Effects of primary variables, such as the shearing time during particle formation, surfactant concentration, organic phase concentration, and mode of water-soluble shell monomer addition, were studied. The results indicated that polyvinylalcohol (PVOH), used as the surfactant/stabilizer, reacted with the oil-soluble shell monomers. The depletion of PVOH, especially when PVOH concentration was low, resulted in rapid growth of particle size and, eventually, suspension failure. The kinetic data revealed a particle formation mechanism which consists of two processes. The first process is the formation of an equilibrium particle size by the equilibrium process of particle breakage due to the mechanical shearing force and coalescence due to collisions among particles and surface tension forces. The second process is the reaction between PVOH and oil-soluble shell monomer which leads to the depletion of PVOH and consequently causes more coalescence of particles and a significant increase in the equilibrium particle size. The net effect of these two processes shows an optimum shearing time where the smallest particle size can be attained, and this optimum time is a function of several primary variables. Methods to prevent the reaction and therefore the depletion of PVOH are proposed.