Liposome-encapsulated hemoglobin (LEH) is being developed at the Naval Research Laboratory as a universally transfusable oxygen-carrying blood replacement. A chemical engineering scale-up feasibility study has been completed recently. We report here the development of an encapsulation method which produces liters of phospholipid/cholesterol liposomes containing at least 16 g% hemoglobin in a few hours. The 0.2 micron liposomes are produced with a Microfluidizer TM (Microfluidics Corp., Newton, MA) adapted for this purpose, and then washed and sterile filtered using a Pellicon (Millipore, Bedford, MA) tangential flow filtration device. Previously, production limitations and lack of sterility have been serious barriers to toxicity testing for all the researchers engaged in related investigations. The biophysical properties of the LEH thus produced are ideal for use as a blood substitute, resembling those of red blood cells. The oxygen-binding affinity of LEH can be maintained at the level of fresh whole blood for many weeks by co-encapsulation of pyridoxal-5-phosphate. The circulation persistence time of liposomes is a function of the type of phospholipid. We have developed a formulation which has a circulation persistence time of 15-20 hours. The LEH oxygen binding characteristics, circulation half-life and its lipid composition dependence, scale-up preparation method, and a sterilization method are presented.