Ceramide is a precursor of complex sphingolipids and also plays important roles in cell signaling. With the advances in lipid analytical technologies, the structural diversity of ceramide species have become evident, and the complexity of cellular metabolism and function associated with distinct ceramide species is beginning to be revealed. One of the common structural variations of ceramide is 2′-hydroxylation of the N-acyl chain. Fatty acid 2-hydroxylase (FA2H) is one of the enzymes that introduce the hydroxyl group during de novo synthesis of ceramide. FA2H is essential for the normal functioning of the nervous system, as evidenced by demyelinating disorder associated with FA2H mutations in humans and mice. Studies of Fa2h mutant mice indicate that lack of 2′-hydroxy galactosylceramide in the myelin membrane results in loss of long-term stability of myelin and eventual demyelination. FA2H also regulates differentiation of various cell types (epidermal keratinocytes, schwannoma cells, adipocytes). When provided exogenously, ceramide induces apoptosis in many cell types. Interestingly, the effective concentration of 2′-hydroxy ceramide that induces apoptosis is significantly lower compared to non-hydroxy ceramide, and cells die much more rapidly, suggesting that 2′-hydroxy ceramide can mediate proapoptotic signaling distinct from non-hydroxy ceramide. Collectively, current evidence clearly shows that 2′-hydroxy ceramide and 2′-hydroxy complex sphingolipids have unique functions in membrane homeostasis and cell signaling that could not be substituted by non-hydroxy counterparts.