Unilamellar liposomes that retain their contents in the systemic circulation can alter the pharmacokinetics of anticancer agents in favorable ways. It has long been recognized that certain liposome compositions may increase the local drug concentration substantially above that achievable with a free drug. We report here that liposomes can alter the in vivo disposition of an entrapped drug not only on a macroscopic but also on a microscopic scale. We show through in vitro studies that intact liposomes composed of distearoylphosphatidylcholine and cholesterol and containing daunorubicin (DaunoXome) are taken up into P1798 tumor cells. These liposomes produce an enhanced cytotoxicity relative to the free drug for incubation times longer than about 8 h. For in vivo studies, we developed and used a noninvasive fluorescence imaging technique to follow the accumulation of liposomal daunorubicin within murine tumors. With this method, we show that the maximum concentration of the available liposomal drug in tumors exceeds that of the free drug, and additionally, liposomal daunorubicin persists at high levels for several days. Total liposome-delivered drug fluorescence from whole tumor extracts peaks at about 8 h. In comparison, the fluorescence intensity of daunorubicin demonstrate persistent high levels of daunorubicin fluorescence within cells and throughout the tumor masses. Free daunorubicin, in contrast, transiently achieves modest levels of fluorescence and rapidly drops to background within a few h. These results indicate distinct mechanisms for the localization of free and liposomal daunorubicin, suggesting that liposmal daunorubicin can provide sustained intracellular levels of the drug within the tumor.