Abstract An important application of hepatocyte cultures is identification of drugs acting as inducers of biotransformation enzymes that alter metabolic clearance of other therapeutic agents. In the present study we optimized an in vitro system with hepatocytes cultured in alginate microspheres that allow studies of enzyme induction with excellent sensitivity. Induction factors obtained with standard inducers, such as 3-methylcholanthrene or phenobarbital, were higher compared to those with conventional hepatocyte co-cultures on collagen coated dishes. This is illustrated by activities of 7-ethoxyresorufin- O-deethylase (EROD) after incubation with 5 μM 3-methylcholanthrene (3-MC), a standard inducer for cytochrome P4501A1 and 1A2. Mean activities for solvent controls and 3-MC exposed cells were 2.99 and 449 pmol/min/mg protein (induction factor: 150) for hepatocytes cultured in microspheres compared to 2.72 and 80.6 pmol/min/mg (induction factor: 29.6) for hepatocytes on collagen coated dishes. To compare these in vitro data to the in vivo situation male Sprague Dawley rats, the same strain that was used also for the in vitro studies, were exposed to 3-MC in vivo using a protocol that guarantees maximal induction. Activities were 29.2 and 1656 pmol/min/mg in liver homogenate of solvent and 3-MC treated animals (induction factor: 56.7). Thus, the absolute activities of 3-MC exposed hepatocytes in microspheres are lower compared to the in vivo situation. However, the induction factor in vitro was even higher compared to the in vivo situation (150-fold versus 56.7-fold). A similar scenario was observed using phenobarbital (0.75 mM) for induction of CYP2B and 3A isoenzymes: induction factors for testosterone hydroxylation in position 16β were 127.5- and 50.4-fold for hepatocytes in microspheres and conventionally cultured hepatocytes, respectively. The new in vitro system with hepatocytes embedded in solid alginate microspheres offers several technical advantages: (i) the solid alginate microspheres can be liquefied within 60 s, allowing a fast and complete harvest of hepatocytes; (ii) alginate capsules are stable allowing transport and mechanical stress; (iii) high numbers of hepatocytes can be encapsulated in short periods; (iv) defined cell numbers between 600 hepatocytes, the approximate number of cells in one capsule, and 18 × 10 6 hepatocytes, the number of hepatocytes in 6 ml alginate, can be transferred to a culture dish or flask. Thus, encapsulated hepatocytes allow a flexible organization of experiments with respect to cell number. In conclusion, we optimized a technique for encapsulation of hepatocytes in alginate microspheres that allows identification of enzyme induction with an improved sensitivity compared to existing systems.