Techniques for immunoisolation and immobilization of viable cells within semipermeable microcapsules have been developed using highly sophisticated droplet generator systems. We propose here an indigenously designed, simple and efficient droplet generator system for encapsulation of the pancreatic islets employing chitosanalginate matrix. The droplet generator system comprises of a needle assembly, a 3-way valve with extended rubber tubing and a filtration unit connected to a pressure pump. Microbeads of the size of around 400 μm diameter or even lesser (minimun attainable size 20.2 μm) could be easily generated using the droplet generator system proposed here. Islet microcapsules cultured in Roswell Park Memorial Institute (RPMI) 1640 with 10% fetal calf serum showed around 98% viability, comparable to that of the non-encapsulated islets. Transplantation of microencapsulated islets to streptozotocin (STZ)-induced diabetic mice, resulted in disappearance of hyperglycemia and restoration of normoglycaemia during a 30-day follow-up suggesting graft functionality. No graft failures were observed in any of the transplanted mice (n = 15) and none of them showed membrane associated fibrous overgrowth, which can be attributed to the fibroblast-growth inhibitory properties of chitosan. The proposed design appears to be superior in its simplicity and cost effectiveness and comparable in performance with the microcapsule generator designs proposed so far. The proposed system can be further exploited for encapsulation and immunoisolation of various cell types in alginate based matrices.