Indomethacin, a non-steroidal anti-inflammatory drug was successfully entrapped into liposomes (soyabean lecithin, cholesterol, stearylamine or dicetylphosphate) with uniform size distribution. The liposomal vesicles were derived from dried effervescent granule-based proliposomes. The in vivo distribution characteristics of the reconstituted liposomal indomethacin was studied in normal rats and in the rats with inflamed paws following intravenous administration. The localization of the liposome-based indomethacin was in liver, lungs and inflamed tissues (inflamed rats studies). Further, an enhanced anti-inflammatory activity of lipo-indomethacin was found as compared with the activity recorded for plain drug in carrageenan induced paw oedema in rats.