Revised concepts of bilirubin encephalopathy have been revealed by studies of bilirubin toxicity in cultured CNS cells and in congenitally jaundiced Gunn rats. Bilirubin neurotoxicity is related to the unbound (free) fraction of unconjugated bilirubin (Bf), of which the dominant species at physiological pH is the protonated diacid, which can passively diffuse across cell membranes. As the binding affinity of plasma albumin for bilirubin decreases strikingly as albumin concentration increases, previously reported Bf values were underestimated. Newer diagnostic tests can detect reversible neurotoxicity before permanent damage occurs from precipitation of bilirubin (kernicterus). Early toxicity can occur at Bf only modestly above aqueous saturation and affects astrocytes and neurons, causing mitochondrial damage, resulting in impaired energy metabolism and apoptosis, plus cell-membrane perturbation, which causes enzyme leakage and hampers transport of neurotransmitters. The concentrations of unbound bilirubin in the cerebro-spinal fluid and CNS cells are probably limited mainly by active export of bilirubin back into plasma, mediated by ABC transporters present in the brain capillary endothelium and choroid plexus epithelium. Intracellular bilirubin levels may be diminished also by oxidation, conjugation and binding to cytosolic proteins. These new concepts may explain the varied susceptibility of neonates to develop encephalopathy at any given plasma bilirubin level and the selective distribution of CNS lesions in bilirubin encephalopathy. They also can suggest better strategies for predicting, preventing and treating this syndrome.