The prognosis of pancreatic adenocarcinoma is poor and current treatment is for the most part ineffective. We describe here a novel treatment strategy using a mouse model system for pancreatic cancer. Human embryonic epithelial cells have been genetically modified to express the cytochrome P450 2B1 enzyme under the control of a CMV immediate-early promoter. This CYP2B1 gene converts oxazaphosphorines (ifosfamide or cyclophosphamide) to their active cytotoxic compounds, phosphoramide mustard, which alkylates DNA, and acrolein, which alkylates proteins. A number of assays were performed to demonstrate the CYP2B1 gene function as well as toxic effects on neighbouring cells (bystander effect). The cells were then encapsulated in a cellulose sulphate formulation shown to be well tolerated in the pancreas of immunocompetent mice, and injected 1 cm away from pre-established tumours derived from a human pancreatic tumour cell line (PaCa-44). Intraperitoneal administration of low-dose ifosfamide to tumour bearing mice that received the encapsulated cells results in partial or even complete tumour ablation. Such an in situ chemotherapy strategy utilizing genetically modified cells in an immunoprotected environment may prove useful for solid tumour therapy in man.