Nimesulide, a non-steroidal anti-inflammatory drug, was incorporated into multilamellar liposomes to improve its performance on topical administration. The drug was loaded onto liposomes employing thin film hydration technique. Various process and formulation variables were investigated to obtain the liposomal products of desired quality. Liposomes were monitored for percent drug entrapment, after separating the unentrapped drug by mini column centrifugation, for vesicular properties (such as size distribution profile, morphological attributes and agglomeration tendency), drug diffused through synthetic semipermeable membrane, and drug leakage. Systematic optimization studies were carried out using 3(2) factorial design to select the optimized liposomal composition with reference to percent drug entrapment, drug diffusion and leakage. The optimized batch of liposomes was subjected to drug permeation and drug retention studies employing rat skin and human cadaver skin. In comparison to methanolic solution of pure nimesulide, liposomal formulations were found to retain higher amounts of nimesulide in the skin. Anti-inflammatory studies, using carragenan-induced rat paw edema model, indicated significantly better performance of liposomally entrapped nimesulide in comparison to the marketed gel formulation and the Carbopol gel containing nimesulide.