Reports suggest that excessive ceramide accumulation in mitochondria is required to initiate the intrinsic apoptotic pathway and subsequent cell death, but how ceramide accumulates is unclear. Here we report that liver mitochondria exhibit ceramide formation from sphingosine and palmitoyl-CoA and from sphingosine and palmitate. Importantly, this activity was markedly decreased in liver from neutral ceramidase (NCDase)-deficient mice. Moreover, the levels of ceramide were dissimilar in liver mitochondria of WT and NCDase KO mice. These results suggest that NCDase is a key participant of ceramide formation in liver mitochondria. We also report that highly purified liver mitochondria have ceramidase, reverse ceramidase, and thioesterase activities. Increased accessibility of palmitoyl-CoA to the mitochondrial matrix with the pore-forming peptide zervamicin IIB resulted in 2-fold increases in palmitoyl-CoA hydrolysis by thioesterase. This increased hydrolysis was accompanied by an increase in ceramide formation, demonstrating that both outer membrane and matrix localized thioesterases can regulate ceramide formation. Also, ceramide formation might occur both in the outer mitochondrial membrane and in the mitochondrial matrix, suggesting the existence of distinct ceramide pools. Taken together, these results suggest that the reverse activity of NCDase contributes to sphingolipid homeostasis in this organelle in vivo.