Deflazacort (DFZ) is an oxazoline derivative of prednisolone with anti-inflammatory and immunosuppressive activity. The aim of this study was to investigate and to identify the main degradation product of DFZ, and to evaluate the anti-inflammatory effect of both DFZ and its major degradation product (namely DDP1). DFZ was subjected to alkaline and acid degradation. In 0.1 N NaOH, DFZ was immediately degraded and 99.0% of product DDP1 was detected by high performance liquid chromatography (HPLC). The HPLC method was ideal to separate the primary and other minor degradation products and was carried out using C18 column, mobile phase consisting of water: acetonitrile: (60:40, v/v) with flow rate of 1.0 mL/min and detection at 244 nm. DDP1 was isolated and identified as 21-hydroxy deflazacort (21-OH-DFZ) by NMR, IR and LCMS. The in vivo pharmacological assays showed that both DFZ as 21-OH-DFZ are active in in vivo and in vitro inflammatory models, but 21-OH-DFZ is more potent than DFZ.