Gold nanoshells (~160 nm in diameter) were encapsulated within a shell of temperature-responsive poly(-isopropylacrylamide--acrylic acid) (P(NIPAM--AA)) using a surface-bound rationally-designed free radical initiator in water for the development of a photothermally-induced drug-delivery system. The morphologies of the resultant hydrogel-coated nanoshells were analyzed by scanning electron microscopy (SEM), while the temperature-responsive behavior of the nanoparticles was characterized by dynamic light scattering (DLS). The diameter of the P(NIPAM--AA) encapsulated nanoshells decreased as the solution temperature was increased, indicating a collapse of the hydrogel layer with increasing temperatures. In addition, the optical properties of the composite nanoshells were studied by UV-visible spectroscopy. The surface plasmon resonance (SPR) peak of the hydrogel-coated nanoshells appeared at ~800 nm, which lies within the tissue-transparent range that is important for biomedical applications. Furthermore, the periphery of the particles was conjugated with the model protein avidin to modify the hydrogel-coated nanoshells with a fluorescent-tagged biotin, biotin-4-fluorescein (biotin-4-FITC), for colorimetric imaging/monitoring.