Palmitoyl-protein thioesterase is a lysosomal long-chain fatty acyl hydrolase that removes fatty acyl groups from modified cysteine residues in proteins. Mutations in palmitoyl-protein thioesterase were recently found to cause the neurodegenerative disorder infantile neuronal ceroid lipofuscinosis, a disease characterized by accumulation of amorphous granular deposits in cortical neurons, leading to blindness, seizures, and brain death by the age of three. In the current study, we demonstrate that [35S]cysteine-labeled lipid thioesters accumulate in immortalized lymphoblasts of patients with infantile neuronal ceroid lipofuscinosis. The accumulation in cultured cells is reversed by the addition of recombinant palmitoyl-protein thioesterase that is competent for lysosomal uptake through the mannose-6-phosphate receptor. The [35S]cysteine-labeled lipids are substrates for palmitoyl-protein thioesterase in vitro, and their formation requires prior protein synthesis. These data support a role for palmitoyl-protein thioesterase in the lysosomal degradation of S-acylated proteins and define a major new pathway for the catabolism of acylated proteins in the lysosome.