Trypsin has been entrapped within liposomes prepared from egg yolk phospholipides by the method of controlled dialysis, and the hydrolysis kinetics of Nα-benzoyl-DL-arginine p-nitroaniline catalyzed by the liposome-entrapped trypsin has been studied by monitoring the flux of substrate and product across the liposomal membrane. The partitioning of the substrate and product between liposomal and extraliposomal environment has been found to represent the main factor in the kinetic control of the hydrolysis.