Doxorubicin is a potent antineoplastic agent with activity against numerous human cancers. Encapsulation of doxorubicin inside a liposome alters bioavailability, biodistribution and thus its biological activity significantly. The physical properties of the liposome (size, lipid components and lipid dose) play a major role in determining drug retention and pharmacokinetics. The therapeutic benefits of liposomal doxorubicin will therefore depend on these physical characteristics. Here we review the toxicity and efficacy of liposomal doxorubicin determined for various liposome compositions (size, lipid composition and drug-to-lipid ratio). These physical properties can be independently varied using the transmembrane pH gradient-dependent drug encapsulation procedure. The results show that the toxicity of the formulation is related to drug retention in the circulation. The antitumor activity is more sensitive to the size of the liposomes. By optimizing these parameters, liposomal doxorubicin formulations can be optimized for improved therapeutic activity.