Bioactive N‐acylethanolamines, including the endocannabinoid anandamide and anti‐inflammatory N‐palmitoylethanolamine, are hydrolyzed to fatty acids and ethanolamine in animal tissues by the catalysis of fatty acid amide hydrolase (FAAH). We recently cloned cDNA of N‐acylethanolamine‐hydrolyzing acid amidase (NAAA), another enzyme catalyzing the same reaction, from human, rat, and mouse. NAAA reveals no sequence homology with FAAH and belongs to the choloylglycine hydrolase family. The most striking catalytic property of NAAA is pH optimum at 4.5–5, which is consistent with its immunocytochemical localization in lysosomes. In rat, NAAA is highly expressed in lung, spleen, thymus, and intestine. Notably, the expression level of NAAA is exceptionally high in rat alveolar macrophages. The primary structure of NAAA exhibits 33–35% amino acid identity to that of acid ceramidase, a lysosomal enzyme hydrolyzing ceramide to fatty acid and sphingosine. NAAA actually showed a low, but detectable ceramide‐hydrolyzing activity, while acid ceramidase hydrolyzed N‐lauroylethanolamine. Thus, NAAA is a novel lysosomal hydrolase, which is structurally and functionally similar to acid ceramidase. These results suggest a unique role of NAAA in the degradation of N‐acylethanolamines.