The Purpose of this study was to establish the use of a developed dry powder inhaler of budesonide liposomes in pulmonary drug delivery. Budesonide liposomes composed of egg phosphatidyl choline (EPC) and cholesterol were prepared using a lipid-film hydration technique. The liposomal dispersion was freeze dried and formulated to a dry powder inhaler. The entrapped drug values (91.79% to 78.99%) of freeze dried liposomes were estimated in prepared batches after purification from the free drug by centrifugation of the rehydrated vesicles. In vitro drug retention was evaluated using methanolic phosphate buffer saline and bronchoalveolar lavage, following incubation at 37 degrees C. All batches were found to retain more than 63.54% of budesonide within liposomes at the end of 24 h. Rehydrated budesonide liposomes or nonencapsulated budesonide was delivered to rat lungs by intratracheal administration. The pulmonary drug disposition was assessed by simultaneous monitoring of drug levels in the bronchoalveolar lavage and lung tissue. After intratracheal administration, cumulative drug levels in the lung tissue indicated that the targeting factor was at least 1.66 times higher in liposomes. The maximal drug concentration in the lung homogenate for the liposomal dry powder inhaler was 36.64 micrograms as compared to 78.56 micrograms with the plain drug. Similarly, the time for maximum drug concentration in the lung homogenate for the liposomal dry powder inhaler was 9-12 h as compared to 3 h for that of the plain drug. Hence, the use of a developed liposomal budesonide dry powder inhaler was found to provide desired drug levels in the lungs for a prolonged period of time, which is expected to enhance the therapeutic index of the drug and probably reduce the dose and cost of therapy as well.