Carbon encapsulated magnetic Co nanoparticles have been synthesized by modified arc-discharge method. Both high-resolution transmission electron microscopy (HREM) and powder x-ray diffraction (XRD) profiles reveal the presence of 8-15nm diameter crystallites coated with 1-3 carbon layers. Specially, HREM images indicate that the intimate and contiguous carbon fringe around those Co nanoparticles is good evidence for complete encapsulation by carbon shell layers. The encapsulated phases are identified as hcp (α)-Co, fcc (β)-Co and cobalt carbide (Co3C) nanocrystals by using x-ray diffraction, electron diffraction and energy dispersive x-ray analysis. However, some fcc (β)-Co particles with a significant fraction of stacking faults are observed by HREM and confirmed by means of numerical Fourier transform (FFT) of HREM lattice images. In particular, the carbon encapsulation formation and growth mechanism are also reviewed.