Pulmonary interstitial fibrosis is an important component of the pathology of bronchopulmonary dysplasia (BPD). There is increasing evidence to support the role of infection, especially sepsis, in the pathogenesis of BPD. We have investigated the effects of combining chronic oxygen toxicity and lipopolysaccharide endotoxin in rats. Our hypothesis is that endotoxin activates pulmonary macrophages in an O2 damaged lung, which in turn activates pulmonary lipocytes to release stored retinoids and, with chronicity, initiates production of TGF-b by these cells. In the liver paradigm of fibrosis, this is followed by development of receptors for PDGF on lipocytes leading to autocrine proliferation, transformation into myofibroblasts and the production of cross-linked collagens. Rats treated with 100% O2 for 36 hours, 90% O2 for 36 hours, 80% O2 for 6 weeks and IP endotoxin for 3 days beginning at 72 hours, showed early immunostaining of lung epithelium, lung lipocytes and of liver lipocytes with TGF-β3, which disappeared with chronicity by 36 days. PDGF immunostaining also appeared early in lung and liver lipocytes and persisted for 36 days. Alpha smooth muscle actin, which appears with lipocyte transformation to myofibroblasts,showed immunoreactivity in cells around respiratory bronchioles and at septal tips, increasing greatly with chronicity. The presence of collagen in alveolar walls and septal tips also increased with time as shown by van Gieson staining and by electron microscopy. We suggest that activation of pulmonary lipocytes is an important component of the production of cross-linked collagen and its deposition in pulmonary interstitial fibrosis.