Retinoids play a key role in the formation of pulmonary alveoli. Lipid interstitial cells (LICs) of the alveolar wall store retinol and are concentrated at sites of alveolus formation, suggesting they are an endogenous source of retinoids for alveolus formation. We show in cultured rat lung cells that LICs synthesize and secrete all-trans retinoic acid (ATRA); its secretion is halved by dexamethasone, an inhibitor of alveolus formation. In a second alveolar wall cell, the pulmonary microvascular endothelial cell (PMVC), ATRA increases expression of the mRNA of cellular retinol binding protein-I (CRBP-I), a protein involved in ATRA synthesis. Serum-free, exogenous ATRA-free medium conditioned by LICs rich in retinol storage granules caused a 10-fold greater increase of CRBP-I mRNA in PMVCs than media conditioned by LICs with few retinol storage granules. This action of medium conditioned by retinol storage granule-rich LICs is decreased by a retinoic acid receptor pan-antagonist and by a retinoid X receptor pan-antagonist, suggesting the responsible molecule(s) is a retinoid and that retinoid signaling occurs in a paracrine fashion.