A liposomal formulation containing a muramyl dipeptide (MDP) analogue with potential immunomodulatory and antineoplastic activities. Muramyl tripeptide phosphatidylethanolamine (MTP-PE), a derivative of the mycobacterial cell wall component MDP, activates both monocytes and macrophages. Activated macrophages secrete cytokines and induce the recruitment and activation of other immune cells, which may result in indirect tumoricidal effects. Liposomal encapsulation of MTP-PE prolongs its half-life and enhances tissue targeting.