Amphotericin B is an efficacious but extremely toxic anti fungal drug. Recently it has been shown that the incorporation of Amphotericin B in multilamellar liposomes results in a marked reduction in drug toxicity in mice with no loss of anti fungal potency. Until now, the mechanistic basis of the enhanced therapeutic index of liposomal Amphotericin B has been unclear. In this report, however, we show that the in vivo effects can be mimicked in vitro where free but not liposomal Amphotericin B causes lysis of erythrocytes while both free and liposomal drug kill fungal cells. These results suggest that the markedly improved therapeutic index of liposomal Amphotericin B is largely due to a fundamental alteration in the ability of the drug to interact with mammalian cell membranes rather than to alterations in pharmacokinetics or drug distribution.