The relationship of cholesteryl ester hydrolysis to the physical state of the cholesteryl ester in J774 murine macrophages was explored in cells induced to store cholesteryl esters either in anisotropic (ordered) inclusions or isotropic (liquid) inclusions. In contrast to other cell systems, the rate of cholesteryl ester hydrolysis was faster in cells containing anisotropic inclusions than in cells containing isotropic inclusions. Two contributing factors were identified. Kinetic analyses of the rates of hydrolysis are consistent with a substrate competition by co-deposited triglyceride in cells with isotropic inclusions. In addition, hydrolysis of cholesteryl esters in cells with anisotropic droplets is mediated by both cytoplasmic and lysosomal lipolytic enzymes, as shown by using the lysosomotropic agent, chloroquine, and an inhibitor of neutral cholesteryl ester hydrolase, umbelliferyl diethylphosphate. In cells containing anisotropic inclusions, hydrolysis was partially inhibited by incubation in media containing either chloroquine or umbelliferyl diethylphosphate. Together, chloroquine and umbelliferyl diethylphosphate completely inhibited hydrolysis. However, when cells containing isotropic inclusions were incubated with umbelliferyl diethylphosphate, cholesteryl ester hydrolysis was completely inhibited, but chloroquine had no effect. Transmission electron microscopy demonstrated a primarily lysosomal location for lipid droplets in cells with anisotropic droplets and both non-lysosomal and lysosomal populations of lipid droplets in cells with isotropic droplets. These results support the conclusion that there is a lysosomal component to the hydrolysis of stored cholesteryl esters in foam cells.