A double emulsion, film dehydration/rehydration approach was developed for encapsulation of hemoglobin (Hb) at high concentration in liposomes. The liposome-encapsulated Hb (LEH) membrane was formulated to contain either phosphatidylinositol (PI) or polyethyleneglycol phosphatidylethanolamine (PEG-PE) along with partially hydrogenated egg-PC, cholesterol, and alpha-tocopherol in a molar ratio of 0.1:1:1:0.02, respectively. The methods introduced in this study followed a multi-step procedure. First, a primary emulsion of Hb in organic solvent containing dissolved lipids was formed. Next, the emulsion was dispersed into an aqueous continuous phase to form a water-in-oil-in-water type double emulsion. Other than the lipids noted above, no surfactants were used in this system. The double emulsion was then converted to LEH by the following steps: evaporating the organic solvent; dehydrating the water to form a dry, thin Hb-lipid film; rehydrating the film in Hb solution to form the LEH; reducing the size of the LEH using 'microfluidization' i.e., high pressure/hydrodynamic shear; and lastly washing the down-sized LEH in buffer. Physico-chemical properties of the model LEH were measured, including oxygen content, encapsulated Hb concentration, oxygen affinity and cooperativity, vesicular size distribution, viscosity, and stability. The suitability of LEH prepared in this manner as a red blood cell substitute was shown using continuous isovolemic exchange transfusion techniques in a small animal model: clearance, efficacy and acute toxicity were evaluated.