Palmitoyl-protein thioesterase is a lysosomal hydrolase that removes long chain fatty acyl groups from modified cysteine residues in proteins. Mutations in this enzyme were recently shown to underlie the hereditary neurodegenerative disorder, infantile neuronal ceroid lipofuscinosis, and lipid thioesters derived from acylated proteins were found to accumulate in lymphoblasts from individuals with the disorder. In the current study, we describe the cloning and expression of a second lysosomal thioesterase, palmitoyl-protein thioesterase 2 (PPT2), that shares an 18% identity with palmitoylprotein thioesterase. Transient expression of a PPT2 cDNA led to the production of a glycosylated lysosomal protein with palmitoyl-CoA hydrolase activity comparable with palmitoyl-protein thioesterase. However, PPT2 did not remove palmitate groups from palmitoylated proteins that are substrates for palmitoyl-protein thioesterase. In cross-correction experiments, PPT2 did not abolish the accumulation of protein-derived lipid thioesters in palmitoyl-protein thioesterase-deficient cell lines. These results indicate that PPT2 is a lysosomal thioesterase that possesses a substrate specificity that is distinct from that of palmitoyl-protein thioesterase.A growing number of proteins have been shown to undergo post-translational modification by fatty acids that are covalently linked to cysteine residues through a thioester bond (reviewed in Ref. 1). Usually, the modified cysteine residue is located in close proximity to the inner surface of the plasma membrane, and palmitate is the most commonly occurring fatty acid, although stearate, oleate, arachidonate, and small amounts of other fatty acids have also been described. Fatty acid modifications may contribute to intracellular protein localization by facilitating membrane binding and also by strengthening protein-protein interactions (reviewed in Ref. 2). It is also possible that the palmitate plays a structural role that is unique to each modified protein. Cycles of palmitoylation and depalmitoylation have been described for a number of intracellular proteins (3), but the relevant enzyme(s) that catalyze these processes have not been isolated or fully characterized, and the full significance of these cycles remains to be elucidated.In an initial attempt to study the mechanism of depalmitoylation of Ha-Ras, we purified and cloned a thioesterase (palmitoyl-protein thioesterase, which will be referred to as PPT1) 1 that preferentially removes fatty acyl chains of 14 -18 carbons (i.e. myristate, palmitate, stearate, and oleate) from proteins in vitro (4, 5). Although PPT1 was originally purified from the soluble fraction of bovine brain, it was later found to be targeted to lysosomes (6 -8). Mutations in PPT1 were recently found to cause the infantile form of neuronal ceroid lipofuscinosis (INCL) (9), a neurovisceral storage disorder. This disease is characterized by the accumulation of amorphous granular deposits in cortical neurons leading to early visual loss and progressive mental deter...