A method is described for incorporation of water-soluble proteins into liposomal membranes using covalent protein-phospholipid conjugates in detergent solution. A disulfide derivative of phosphatidylethanolamine containing a reactive N-hydroxysuccinimide ester group is synthesized, and the derivative is reacted with serum transferrin in deoxycholate-containing buffer. Disulfide-linked transferrin-phosphatidylethanolamine conjugates containing up to 6 mol phospholipid/mol protein are prepared. The amphiphilic conjugates have solubility properties very similar to integral membrane proteins. The conjugates self-associate to form protein micelles of narrow size distribution (Stokes radii 6-7 nm), and in the presence of excess phospholipid (egg phosphatidylcholine), they readily incorporate into liposomal membranes upon removal of detergent. Stable incorporation into liposomes requires the introduction of two molecules of phosphatidylethanolamine into the transferrin. Using the disulfide linker to release transferrin from the liposomes, evidence is presented for a function of the phosphatidylethanolamine as an anchor-molecule into the liposomal lipid. Optimal conditions for preparation of homogeneous liposomes with diameters in the range 30-125 nm and with a varying content of transferrin are defined. The liposomes appear well suited for studies on liposome-cell membrane interactions.