Etoposide is a semisynthetic compound, widely used in treatment of non small cell lung cancer. However, frequent dosing and adverse effects remain a major concern in the use of etoposide. Liposomal systems for pulmonary drug delivery have been particularly attractive because of their compatibility with lung surfactant components. In the present investigation, pulmonary liposomal delivery system of etoposide was prepared by film hydration method. Various parameters were optimized with respect to entrapment efficiency as well as particle size of etoposide liposomes. For better shelf life of etoposide liposomes, freeze drying using trehalose as cryoprotectant was carried out. The liposomes were characterized for entrapment efficiency, particle size, surface topography, and in vitro drug release was carried out in simulated lung fluid at 37° at pH 7.4. The respirable or fine particle fraction was determined by using twin stage impinger. The stability study of freeze dried as well as aqueous liposomal systems was carried out at 2-8° and at ambient temperature (28±4°). The freeze dried liposomes showed better fine particle fraction and drug content over the period of six months at ambient as well as at 2-8° storage condition compared to aqueous dispersion of liposomes.