Nitrogen mustard (NM) is a vesicant known to target the lung, causing acute injury which progresses to fibrosis. Evidence suggests that activated macrophages contribute to the pathologic response to NM. In these studies, we analyzed the role of lung lipids generated following NM exposure on macrophage activation and phenotype. Treatment of rats with NM (0.125 mg/kg, i.t.) resulted in a time-related increase in enlarged vacuolated macrophages in the lung. At 28 d post exposure, macrophages stained positively for Oil Red O, a marker of neutral lipids. This was correlated with an accumulation of oxidized phospholipids in lung macrophages and epithelial cells, and increases in bronchoalveolar lavage fluid (BAL) phospholipids and cholesterol. RNA-sequencing and immunohistochemical analysis revealed that lipid handling pathways under the control of the transcription factors LXR, FXR, PPAR-ɣ and SREBP were significantly altered following NM exposure. Whereas at 1-3 d post NM, FXR and the downstream oxidized low density lipoprotein receptor, Cd36, were increased, Lxr and the lipid efflux transporters, Abca1 and Abcg1, were reduced. Treatment of naïve lung macrophages with phospholipid and cholesterol enriched large aggregate fractions of BAL prepared 3 d after NM exposure resulted in upregulation of Nos2 and Ptgs2, markers of pro-inflammatory activation, while large aggregate fractions prepared 28 d post NM upregulated expression of the anti-inflammatory markers, Il10, Cd163, and Cx3cr1, and induced the formation of lipid-laden foamy macrophages. These data suggest that NM-induced alterations in lipid handling and metabolism drive macrophage foam cell formation, potentially contributing to the development of pulmonary fibrosis.