Liposome’s are acceptable and superior carriers and have ability to encapsulate hydrophilic and lipophilic drugs and protect them from degradation. Liposome’s are microparticulate lipoidal vesicles which are under extensive investigation as drug carriers for improving the delivery of therapeutic agents. Due to new developments in liposome technology, several liposome-based drug formulations are currently in clinical trial, and recently some of them have been approved for clinical use. Reformulation of drugs in liposomes has provided an opportunity to enhance the therapeutic indices of various agents mainly through alteration in their biodistribution. This review discusses the potential applications of liposomes in drug delivery with examples of formulations approved for clinical use, their preparation method, targeting, mechanism of formation, liposome component and the problems associated with further exploitation of this drug delivery system.