Lysosomal accumulation of unesterified (free) cholesterol, following the phagocytic incorporation of cholesteryl oleate lipid droplets, was quantitatively characterized in a murine J774 macrophage foam cell model. The induction of phagocytic incorporation by the macrophages, using an inverted culture technique, allowed the rapid delivery of large amounts of cholesteryl ester droplets to the lysosomes, leading to the subsequent generation of free cholesterol. The lysosomally generated free cholesterol was differentiated from the membrane cholesterol by a double radiolabeling procedure. Free cholesterol accumulation was quantitated in a population of low density lipid-filled lysosomes prepared by ultracentrifugal isolation of a floating lipid fraction from a homogenate of the cholesteryl ester-loaded cells. About 10% of the total N-acetyl-beta-glucosaminidase activity, a lysosomal marker, was recovered in the lipid fraction. Negligible amounts of alkaline phosphodiesterase-1, a plasma membrane marker, or membrane cholesterol were present in this fraction. Electron microscopic and cytochemical analysis of the isolated lipid fraction revealed the presence of lysosomes in the fraction with a diameter ranging from 1.5 to 4 microns. Continued hydrolysis of incorporated cholesteryl ester over a 24-h incubation resulted in approximately 30% of the generated free cholesterol in lipid-filled lysosomes. The accumulation of free cholesterol occurred whether or not the cholesterol esterifying enzyme, acyl-CoA: cholesterol acyltransferase, was inhibited. In addition, substantial amounts of free cholesterol accumulated even in the presence of efficient cholesterol acceptor particles, apolipoprotein high density lipoprotein-phosphatidylcholine complexes which stimulate cholesterol efflux. Also, increased accumulation of free cholesterol in the lipid fraction was observed when cholesteryl ester-loaded cells were treated with the compound U-18666A which blocks the movement of lysosomal cholesterol. The data demonstrate that the phagocytic incorporation and hydrolysis of cholesteryl ester lipid droplets by macrophage foam cells lead to a substantial accumulation of free cholesterol in the lipid-filled lysosomes. This process could result in a build-up of lysosomal free cholesterol in macrophage foam cells during the progression of atherosclerotic plaque.