We have previously demonstrated that liposome encapsulation of doxorubicin (DOX) can alleviate adverse interactions with non-encapsulated DOX and the cyclosporine multidrug-resistant (MDR) modulator Valspodar. We have now investigated the behavior of different liposomal DOX formulations in MDA435LCC6/MDR-1 human breast cancer solid tumor xenograft models to identify liposome characteristics associated with enhanced therapeutic activity and the mechanism whereby increased chemosensitization is achieved. Toxicity studies incorporating conventional phosphatidylcholine (PC)/cholesterol (chol) and sterically stabilized (polyethylene glycol 2000 [PEG]-containing) formulations of DOX indicated that whereas PC/Chol DOX was approximately 3-fold more toxic in the presence of Valspodar, PEG containing distearoylglycerophosphocholine (DSPC)/Chol DOX was minimally affected. In mice bearing MDR tumors, co-administration of Valspodar and egg phosphocholine (EPC)/Chol DOX resulted in modest MDR modulation and efficacy, whereas the sterically stabilized formulation induced reductions in tumor growth equivalent to that achieved for drug-sensitive tumors treated with non-encapsulated DOX. Pharmacokinetic studies revealed a 2.5-fold increase in plasma DOX area under the curve (AUC) upon co-administration of Valspodar with EPC/Chol DOX whereas no such alterations were observed with the sterically stabilized liposomes. Compared to non-encapsulated DOX combined with Valspodar, improvements in efficacy and toxicity correlated with the extent to which liposomal DOX formulations were able to circumvent pharmacokinetic interactions. Confocal microscopy demonstrated that Valspodar increased cell-associated DOX which correlated with the level of anti-tumor efficacy.