Methods are described for the incorporation into phospholipid vesicles of epoxide hydrase isolated from liver microsomes of phenobarbital-treated rabbits. Chromatography on a Sephadex G-50 column of epoxide hydrase and egg yolk phosphatidylcholine treated with sodium cholate yielded homogeneous vesicles with a diameter of about 25 nm and containing 80 to 85% of the protein applied. At high substrate concentrations, the vesicles catalyzed the hydration of benzo(a)pyrene-4,5-oxide and styrene-7,8-epoxide at a rate similar to that obtained with the enzyme in a soluble form. However, the kinetics of styrene glycol formation catalyzed by the vesicular or microsomal preparations were complex. Convex Lineweaver-Burk plots and concave Hill plots were obtained, whereas normal Michaelis-Menten kinetics characterized the hydration catalyzed by the enzyme in a soluble form. The results could be explained if reconstitution of the enzyme into the vesicles gives rise to low affinity high capacity sites for the substrate on the enzyme, or alternatively facilitates the interaction of the substrate with such sites already present. It is suggested that reconstituted liposomes containing both the liver microsomal hydroxylase system and epoxide hydrase may prove to be a good model system for evaluating substrate specificity and factors of importance in the formation of toxic and carcinogenic metabolites by these enzymes.