Exposure of weanling rats to a diet containing elemental tellurium results in a peripheral neuropathy characterized by segmental demyelination and minimal axonal degeneration. One of the earliest ultrastructural abnormalities in tellurium neuropathy is an increased number of cytoplasmic lipid droplets in myelinating Schwann cells. The pathogenesis of these lipid droplets was investigated using light and electron microscopic autoradiography. Nerve lipids were either "prelabeled" with [3H]acetate via in vivo intraneural injection 3 days before a 2-day exposure to tellurium, or "postlabeled" via in vivo intraneural injection or in vitro incubation with [3H]acetate following a 2-day exposure to tellurium. In the prelabeled nerves, myelin became heavily labeled, but the tellurium-induced cytoplasmic lipid droplets were rarely labeled. In the postlabeled nerves, the tellurium-induced cytoplasmic lipid droplets were the most heavily labeled structures within the nerve. These data indicate that the tellurium-induced lipid droplets in Schwann cells are derived from newly synthesized lipid rather than from the early breakdown and internalization of myelin lipids. The earliest biochemical abnormality observed in tellurium neuropathy is an inhibition of cholesterol synthesis at the squalene epoxidase step. This leads to an accumulation of squalene within the nerve. We conclude that the cytoplasmic lipid droplets in Schwann cells contain this accumulated lipid.