Liposomes have long been used as possible compartments for artificial cells, and it has been shown that liposomes can sustain various types of biochemical reactions. To elevate the degree of molecular complexity of the system in liposomes, we have constructed a two-stage genetic network encapsulated in liposomes. This two-stage genetic network was constructed with the plasmid pTH, in which the protein product of the first stage (T7 RNA polymerase) is required to drive the protein synthesis of the second stage (GFP). We show that the two-stage genetic network constructed in a cell-free expression system is functional within liposomes. (C) 2004 Federation of European Biochemical Societies. Published by Elsevier B.V. All rights reserved.