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The purpose of the study was to prepare stable liposomally entrapped budesonide (BUD) for a dry powder inhaler (DPI) formulation. BUD liposomes composed of egg phosphatidyl choline and cholesterol were prepared by lipid film hydration technique and sonicated to have the desired size (<5 μm). A rapid method was used for separation of free drug by centrifugation at a lower centrifugal force (G value). Liposomal dispersion was subjected to lyophilization after blending BUD with cryoprotectant in varying bulk and mass ratios, and percent drug remaining entrapped after lyophilization was optimized. Comparative drug retention studies on storage of DPI formulations were carried out in accordance with International Conference on Harmonization guidelines. Critical relative humidity of the formulations was determined and reported as one of the manufacturing controls. Sucrose was found to be the most effective cryoprotectant when present on both sides of the lamellae of liposomes in a bulk strength of 500 mM and mass ratio of lipid:sugar; 110. Blending of sorbolac before lyophilization showed better retention of encapsulated drug (95.59%). The respirable fraction of the product (20.69±1.50%) was comparable with that of the control (26.49±1.52%), suggesting that the liposomal BUD can be successfully delivered throughout the broncho-pulmonary tree. The findings demonstrate that liposome of BUD can be prepared with a high entrapment value, stabilized by lyophilization, and delivered as an aerosolized DPI. The stability studies of lyophilized product suggests a shelf-life of one year when stored under refrigeration (2°C–8°C).