Neutral ceramidase is a type II integral membrane protein, which is occasionally secreted into the extracellular milieu after the processing of its N-terminal anchor. We found that when overexpressed in CHOP cells, neutral ceramidase hydrolyzed cell surface ceramide, which increased in amount after the treatment of cells with bacterial sphingomyelinase, leading to an increase in the cellular level of sphingosine and sphingosine 1-phosphate. On the other hand, knockdown of the endogenous enzyme by siRNA decreased the cellular level of both sphingolipid metabolites. The treatment of cells with bovine serum albumin significantly reduced the cellular level of sphingosine, but not sphingosine 1-phosphate, generated by overexpression of the enzyme. The cellular level of sphingosine 1-phosphate increased with overexpression of the cytosolic sphingosine kinase. These results suggest that sphingosine 1-phosphate is mainly produced inside of the cell after the incorporation of sphingosine generated on the plasma membranes. The enzyme also seems to participate in the hydrolysis of serum-derived ceramide in the vascular system. Significant amounts of sphingosine as well as sphingosine 1-phosphate were generated in the cell-free conditioned medium of ceramidase transfectants, compared with mock transfectants. No increase in these metabolites was observed if serum or bacterial sphingomyelinase was omitted from the conditioned medium, suggesting that the major source of ceramide is the serum-derived sphingomyelin. A sphingosine 1-phosphate receptor, S1P(1), was internalized much faster by the treatment of S1P(1)-overexpressing cells with conditioned medium of ceramidase transfectants than that of mock transfectants. Collectively, these results clearly indicate that the enzyme is involved in the metabolism of ceramide at the plasma membrane and in the extracellular milieu, which could regulate sphingosine 1-phosphate-mediated signaling through the generation of sphingosine.