An improved PEGylated liposomal formulation of paclitaxel has been developed with the purpose of improving the solubility of paclitaxel as well as the physicochemical stability of liposome in comparison to the current Taxol formulation. The use of 3% (v/v) Tween 80 in the hydration media was able to increase the solubility of drug. The addition of sucrose as a lyoprotectant in the freeze-drying process increased the stability of the liposome particles. There was no significant difference in the entrapment efficiency of paclitaxel between the conventional non-PEGylated liposomes and our PEGylated liposomes. Cytotoxicity in human breast cancer cell lines (MDA-MB-231 and SK-BR-3) of our paclitaxel formulation was less potent compared to Taxol after 24h incubation, but was equipotent after 72 h due to the slower release of drug from the liposome. Our PEGylated liposomes increased the biological half-life of paclitaxel from 5.05 (+/-1.52)h to 17.8 (+/-2.35)h compared to the conventional liposomes in rats. Biodistribution studies in breast cancer xenografted nude mouse model showed that our liposomes significantly decreased the uptake in reticuloendothelial system (RES)-containing organs (liver, spleen and lung) while increasing the uptake in tumor tissues after injection compared to Taxol or the conventional liposomal formulation. Moreover, the PEGylated liposome showed greater tumor growth inhibition effect in in vivo studies. Therefore, our PEGylated liposomal formulation of paclitaxel could serve as a better alternative for the passive targeting of human breast tumors.