Semiconductor nanoparticles in the size range of 2–6 nm are of great current interest, not only because of their size-tunable properties but also because of their dimensional similarity with biological macromolecules (e.g., nucleic acids and proteins). This similarity could allow an integration of nanomaterials with biological molecules, which would have applications in medical diagnostics, targeted therapeutics, and high-throughput drug screening. Here we report new developments in preparing highly luminescent and biocompatible CdSe quantum dots (QDs), and in synthesizing QD-encoded micro- and nano-beads in the size range of 100 nm–10 μm. We show that the optical properties of ZnS-capped CdSe quantum dots are sensitive to environmental factors such as pH and divalent cations, leading to the potential use of quantum dots in molecular sensing. We also show that chemically modified proteins can be used to coat the surface of water-soluble QDs, to restore their fluorescence, and to provide functional groups for bioconjugation. For multiplexed optical encoding, we have prepared large microbeads with sizes similar to that of mammalian cells, and small nanobeads with sizes similar to that of viruses. © 2002 Society of Photo-Optical Instrumentation Engineers.