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Since the first report in 1976, accumulated clinical evidence has supported intravesical Bacillus Calmette–Guerin (BCG) therapy as one of the standard methods of management of intermediate- and high-risk non-muscle invasive bladder cancer. Despite its efficacy, intravesical BCG therapy is associated with a variety of adverse events (AEs), most of which are tolerable or controllable with supportive care. However, some patients receiving intravesical BCG therapy may experience uncommon but severe AEs, leading to cessation of BCG therapy. Not all, but most severe AEs result from either local or systemic infection with live BCG. Intravesical instillation of BCG elicits multiple immune reactions, although the precise immunological mechanism of BCG therapy is not clear. It is convenient to separate the complex reactions into the following three categories: infection of urothelial cells or bladder cancer cells, induction of immune reactions, and induction of antitumor effects. Recently, our knowledge about each category has increased. Based on this understanding, predictors of the efficacy of intravesical BCG therapy, such as urinary cytokine measurement and cytokine gene polymorphism, have been investigated. Recently, preclinical studies using a novel engineered mycobacterium vaccine have been conducted to overcome the limitations of BCG therapy. One approach is Th1 cytokine-expressing recombinant forms of BCG; another approach is development of non-live bacterial agents to avoid AEs due to live BCG infection. We also briefly describe our approach using an octaarginine-modified liposome-incorporating BCG cell wall component to develop future substitutes for live BCG. (Cancer Sci 2013; 104: 22–27)