Many recent reports have demonstrated that rapid uptake of liposomes in vivo by cells of the mononuclear phagocytic system (MPS), which has restricted their therapeutic utility, can be overcome by incorporation of lipids derivatized with the hydrophilic polymer polyethylene glycol (PEG). The structure-function relationship of PEG-derivatized phosphatidylethanolamine (PEG-PE) has been examined by measurement of blood lifetime and tissue distribution in both mice and rats. The results are reviewed and contrasted with those from liposomes without PEG-PE or other surface modifications. With a PEG molecular weight in the range of 1000 to 5000, prolonged circulation and reduced MPS uptake is achieved. After 24 h, up to 35% of the injected dose remains in the blood and less than 10% is taken up by the two major organs of the MPS, liver and spleen, compared with 1% and up to 50%, respectively, for liposomes without PEG-PE. Other important advantages of PEG-PE have been identified: prolonged circulation is independent of liposome cholesterol content, degree of hydrocarbon chain saturation in either the PC or the PE lipid anchor, lipid dose, or addition of most other negatively charged lipids. This versatility in lipid composition and dose is important for controlling drug release in a liposome-based therapeutic agent. Steric stabilization has been proposed as a theoretical basis for the results and some initial results testing this hypothesis have been reported. A description of a theoretical model is presented here and evaluated with the data available. The results are compared with other particulate drug carriers and the range of potential applications are considered.