The liposome drug delivery systems possess significant role in drug formulation in order to improve the therapeutics. The liposomal formulations have been targeted to enhance the therapeutic activity with reduced toxicity. The liposomes can be characterized with respect to physical, chemical and biological parameters. Moreover, the liposomes can be prepared by mechanical method, replacement of organic solvent, fusion of preformed vesicles; and by transformation of size. In addition, liposomes possess various applications which include, treatment of respiratory and eye disorders; brain targeting; cancer therapy; antimicrobial therapy; and gene therapy. The present review discusses about the mechanism, preparation and applications possessed by the liposomes.