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The pathologic hallmark of TED is a lymphocytic infiltration of orbital muscle and fat with expansion of these tissues from edema and deposition of hyaluronic acid and other glycosaminoglycans. 
Patients exhibiting fat expansion alone may present with proptosis and lid retraction. Those with muscle enlargement and more inflammatory features may develop proptosis, periocular inflammatory features, and possible restriction of motility or strabismus if fibrosis develops (figure below shows limited left upgaze from tight inferior rectus muscle). In a limited number of patients with severe muscle enlargemlent, or with a narrow boney orbital apex, or with tight lids limiting anterior displacement of tissues, compression of the optic nerve may ensue (CT Scan image at right below).
TED is an immune-mediated disease which is strongly associated with thyroid immune disorders such as Graves’ disease or Hashimoto’s thyroiditis. 90% of patients with orbitopathy have a current or past history of abnormal systemic thyroid hormone levels, while others may develop abnormal levels in the future. It is important for patients to understand that the orbitopathy is associated with, but not caused by, abnormal thyroid hormone levels; it is a common misconception that the orbital disease should resolve once normal thyroid levels are reached.
Thyroid gland epithelial cells have surface receptors which bind thyroid stimulating hormone (TSH, thyrotropin), a hormone secreted in pulses by the pituitary to control the release of thyroid hormone. In both Graves’ disease and Hashimoto’s thyroiditis, circulating thyrotropin-receptor antibodies (TSH-R Antibodies, TRAb) are present which can bind to these same receptor sites, and initiate and perpetuate the disease.  At least three subtypes of TRAb have been identified, presumed to arise from a small population of abnormal B-lymphocytes: (1) TSI (thyroid stimulating immunoglobulin), which causes hyperthyroidism; (2) blocking TRAb, which prevents TSH from binding to thyroid cells and results in hypothyroidism; (3) binding TRAb, which binds onto TSH receptors transiently, and has little effect on overall thyroid hormone levels.
These circulating antibodies are thought to be mediators in orbitopathy as well, with the likely target being the orbital fibroblast.  Orbital fibroblasts are present in extraocular muscle and in orbital fat. Orbital fibroblasts from patients with TED have increased numbers of TSH-Receptors, which are thought to bind to circulating autoantibodies (TRAb), stimulating adipogenesis and deposition of hyaluronic acid within orbital muscle and fat, the histologic hallmark of TED.
Orbital fibroblasts in patients with TED have also recently been shown to have an increased number of receptors to “insulin-like growth factor-1” (IGF-1 R), and serum from patients with TED has been found to have circulating antibodies directed against IGF-1 receptors.  Binding of IGF-1 receptors has been shown to attract and activate T-lymphocytes and macrophages through inflammatory mediators, which may be the mechanism of initiating and propagating the inflammatory and immune cascade in TED.