In the present work, we developed a novel drug delivery system, liposomes-in-microsphere (LIM) of biodegradable polymers, which is conceived from a combination of the polymer- and the lipid-based delivery systems and can thus integrate the advantages and avoid the drawbacks of the two systems. Liposomes were encapsulated into microspheres of biodegradable polymers by the solvent extraction/evaporation process to form LIMs. The integrity of the liposomes was preserved by modifying the microencapsulation process and coating the liposomes with chitosan. We demonstrated by scanning electron microscopy, laser light scattering and fluorescence spectroscopy that the particle size and surface morphology of the polymeric microspheres did not change significantly with the liposomes encapsulated, the liposomes remained intact within the polymeric matrix of the microspheres, and the encapsulated liposomes could be released from the microspheres in a controlled manner at a nearly constant release rate after an initial off-release period. Decreasing the particle size of liposomes and increasing the pore size of the polymeric matrix shortened the initial off-release period and increased the liposome release rate. In conclusion, a novel drug delivery system, liposomes-in-microsphere, was successfully developed and characterized. The liposome release kinetics could be controlled by the composition and fabrication parameters of the liposomes and polymeric microspheres. Such a novel controlled release system may have potential to be applied for drug delivery and gene therapy.