This study aimed to explore the feasibility of directing a corticosteroid entrapped in a liposome to the airway macrophage and the following conclusions were reached: 1. Small unilamellar lipsomes could be prepared incorporating a corticosteroid and a phospholipid: corticosteroid ratio of 100:1 w:w resulted in 100% corticosteroid entrapment. 2. Guinea pig airway macrophages internalised liposomes in a manner dependent on the incubation temperature, time and the liposome concentration. The extent of internalisation was dependent on the concentration of phosphatidyl serine in the liposome. The mechanism of internalisation was probably receptor mediated endocytosis via the coated pit pathway. The receptor may be the scavenger receptor. 3. Serum proteins inhibited the internalisation of liposomes by macrophages and proteins derived from lung lavage had a similar effect. The mechanism of the inhibition was investigated. 4. Liposomes interacted with lung surfactant in vitro. Under calcium free conditions, lung surfactant appeared to bind to liposomes, whereas in the presence of millimolar calcium ions, components of lung surfactant interacted with the liposome structure. Lung surfactant proteins B and C appeared to be of importance for this interaction. 5. Liposome entrapped corticosteroid inhibited the release of plasminogen activator from quiescent J774 cells and PGE₂ from LPS stimulated J774 cells in vitro. The effect was equivalent to free corticosteroid. Liposomes without corticosteroid were ineffective. 6. Liposomes were localised in airway macrophages and with the surfactant pool in vivo after intra tracheal instillation. The interaction with lung surfactant occurred with time. 7. Liposome entrapped corticosteroid inhibited allergen induced eosinophilia in rats and the response was equivalent to free corticosteroid. Liposomes without corticosteroid were ineffective. Therefore, liposomes can be used for the delivery of therapeutic agents to the lungs and may have potential for the therapy of lung diseases.