Delivery of macromolecular drugs to airway cells after inhalation can be limited by rapid clearance, in vivo degradation, and poor intracellular targeting. Liposome carriers offer an effective method of improving drug stability, but conventional liposomes have limited intracellular targeting capacity and are cleared rapidly by the lungs. Further modification is required to improve liposome-cell interaction and intracellular targeting. Therefore, we proposed conjugating three arginine-rich membrane translocating peptides, namely, HIV-TAT, Antennapedia, and octaarginine, to neutral liposomes as a biocompatible alternative to cationic lipids for intracellular delivery of macromolecules to airway cells. Conjugation did not significantly affect liposome stability, and each system was nebulized to produce aerosols of mean aerodynamic diameter < 1.5 microm. The peptides caused a significant (p < 0.05) increase in liposome-airway cell association compared to untagged liposomes and to DOTAP liposomes. Up to 30% of the peptide-conjugated liposomes added were bound and internalized (via a temperature-dependent, endocytic process) after just 2 h. The novel carriers all delivered encapsulated dextrans rapidly and efficiently to the cytoplasm of Calu-3 cells. Once internalized by the cells, the modified carriers localize for the most part in the cytoplasm with only a small amount of nuclear localization. These peptide-conjugated liposomes were significantly (p < 0.05) less toxic than DOTAP liposomes with octaarginine-coated liposomes the least toxic. These systems, particularly octaarginine-coated liposomes, offer many advantages for drug delivery to airway epithelial cells including increased stability, improved cell binding, and cell uptake with an improved toxicity profile.