Leflunomide, a frequently used medicament, falls under the category of disease modifying anti-rheumatoid drugs. The tablets are the only product available in the market which may lead to liver toxicity upon long-term use. Being a class II drug, there is a need of some novel formulation for minimizing systemic toxicity of drug without compromising its therapeutic potential. Microsponges possess unique characteristics that makes it a versatile drug delivery carrier. Leflunomide loaded Microsponges were prepared with matrix forming polymer (ethyl cellulose) and stabilizer (poly vinyl alcohol) using quasi-emulsion solvent diffusion method. Two independent parameters, namely concentrations of polymer and stabilizing agent, were examined using a full 3 factorial design to determine their impact on particle size and % entrapment efficiency. The optimized formulation showed promising result for particle size (48.96 µm) and entrapment efficiency (89.45%) with spherical and tiny pores on surface. The optimized gel exhibited sustained release up to 8 h (91.46 ± 3.84%) with satisfactory results of flux and permeability coefficient. The developed formulation has good anti-inflammatory properties in wistar rats and a histopathology investigation on rats' skin verified its skin compatibility. The stability study showed stable formulation up to the period of 3 months. These findings demonstrated the potential of microsponges to improve the therapeutic potential of poorly soluble leflunomide.