The present study evaluated the in vivo activity of synthetic lipophilic muramyl tripeptide phosphatidylethanolamine (MTP-PE) when encapsulated into liposomes (phosphatidylcholine-phosphatidylserine, 7:3 molar ratio) and administered intravesically to athymic nude mice with human transitional cell carcinoma 253J-V cells growing in their bladder. Intravesical liposome-MTP-PE was effective in eradicating the human tumors implanted orthotopically in nude mice. Following therapy, activated macrophages were found in the bladders of liposome-MTP-PE-treated mice but not in control mice. In vitro activation of murine macrophages with liposome-MTP-PE increased their cytotoxicity against the 253J-V cell line used in these experiments. This effect was enhanced by cotreatment with interferon-gamma (IFN-gamma). Furthermore, cotreatment of macrophages with both liposome-MTP-PE and IFN-gamma resulted in the secretion of both tumor necrosis factor alpha (TNF-alpha) and interleukin-6 (IL-6). Liposome-encapsulated MTP-PE shows promise as an effective therapeutic agent for bladder carcinoma.