1. An enzyme that hydrolyses sphingomyelin to ceramide (N-acylsphingosine) and phosphorylcholine was isolated from rat liver. 2. The enzyme is particle-bound (mitochondria or lysosomes) and can be solubilized by ultrasonic treatment and freezing and thawing. 3. It has been partially purified by precipitation at pH5.2, neutralization and ammonium sulphate fractionation. 4. The enzyme is activated by Triton X-100 (0.2%) or low concentrations of cetyltrimethylammonium bromide (0.02%), higher concentration being inhibitory. 5. The optimum pH is 5-5.5. 6. Of synthetic substrates tested, the erythro isomers of dl-trans-2-N-palmitoyl-1-O-phosphorylcholinesphingosine or dihydrosphingosine were hydrolysed at a rate similar to the natural compound. The threo isomer was hydrolysed much more slowly. The enzyme had little activity on lecithin. 7. The split products of the hydrolysis have little inhibitory effect.