The unique procedure developed for forming artificial red cells (Science 230, 1165, 1985) allows encapsulation of proteins to concentrations in excess of 20g%. The procedure requires a hypotonic starting solution, whereas the final suspension is equilibrated at 300 mOsm. Hemoglobin (Hb) was one of several proteins encapsulated. The procedure is based on emulsion formation and subsequent evaporation of the nonaqueous phase, a common liposome-formation procedure, but has unique features. The densities of the phases are matched by adding a Freon. The emulsion is formed using conditions that eliminate protein denaturation. This research was designed to evaluate the fine structure at each critical stage using thin section electron microscopy. The results revealed remarkable, previously unseen detail that raises questions about the variety of properties that can be engineered into lipid bilayer structures. The initial emulsion was nonclassical. Submicron particles in large relative numbers suggested a minimal surface tension difference between the two phases. After nearly complete evaporation of the nonaqueous phase, “microcapsule” particles were present but their architecture showed little in common with classical liposomes; there was no evidence of bilayer membranes. Following extrusion, a slow increase in the osmolality to 300 mOsm dramatically altered the architecture of the microcapsules: The encapsulated protein concentration increased, and lipid bilayer membranes were formed. The resulting “liposomes” were often chambered rather than having concentric bilayer structures. Two closely opposed bilayers surrounding a volume of protein solution was a common structure.