A considerable effort has been spent in the past three decades to investigate various aspects of liposomes as novel drug delivery systems. In 1990, the first amphotericin B (AmB) liposomal preparation (L-AmB) under the brand name AmBisome dagger was introduced into the market by Vestar. The successful marketing of the product moved liposomes out of the stage of experimental obscurity to the realistic stage of clinical utility. The launch of AmBisome sparked off the introduction of other lipid-based AmB products marketed by Liposome Technology (Amphocil) and The Liposome Co. (Abelcet). The drive behind the development of a modified formulation of AmB was to improve the therapeutic index of this drug with respect to its major drawback associated with both acute and chronic toxic effects. In a 30-year-long experience with AmB, several reports were recorded in the literature of acute adverse effects, such as fever, rigors, vomiting, cardiotoxicity and hypotension occurring during infusion; while long-term therapy was reported to be associated with hypokalemia, renal dysfunction and hematological abnormalities. Another serious problem encountered with the drug had been the poor response obtained in immunocompromised patients like those with AIDS, neutropenia and cancer patients on chemotherapy. The encapsulation of amphotericin B in liposomal vesicles was hence targeted not only to obtain an improvement in the therapeutic index but also to see if it was useful in eradicating deep-sealed fungal infections in immunocompromised patients. The liposomal AmB was found to have a better therapeutic index and lower toxicity than the commercial AmB preparations. The LD50 of AmBisome in mouse was 175 mg/kg compared with 3.7 mg/kg for Fungizone, the commercial preparation of AmB. Additionally, L-AmB has prolonged circulation time, and extravasates into the site of infection and delivers the drug directly to the site, with no nephrotoxicity and neurotoxicity as experienced with AmB. This review traces the course of development of L-AmB and discusses the rationale behind the development of its liposomal preparation. The results in in vitro, in vivo and clinical studies, mechanism of action, biodistribution, and formulation considerations of L-AmB are described. The clinical experience with the marketed preparation is reviewed.