We previously demonstrated that tumour necrosis factor (TNF)-induced ceramide production by endosomal acid sphingomyelinase (A-SMase) couples to apoptosis signalling via activation of cathepsin D and cleavage of Bid, resulting in caspase-9 and caspase-3 activation. The mechanism of TNF-mediated A-SMase activation within the endolysosomal compartment is poorly defined. Here, we show that TNF-induced A-SMase activation depends on functional caspase-8 and caspase-7 expression. The active forms of all three enzymes, caspase-8, caspase-7 and A-SMase, but not caspase-3, colocalize in internalized TNF receptosomes. While caspase-8 and caspase-3 are unable to induce activation of purified pro-A-SMase, we found that caspase-7 mediates A-SMase activation by direct interaction resulting in proteolytic cleavage of the 72-kDa pro-A-SMase zymogen at the non-canonical cleavage site after aspartate 253, generating an active 57 kDa A-SMase molecule. Caspase-7 down modulation revealed the functional link between caspase-7 and A-SMase, confirming proteolytic cleavage as one further mode of A-SMase activation. Our data suggest a signalling cascade within TNF receptosomes involving sequential activation of caspase-8 and caspase-7 for induction of A-SMase activation by proteolytic cleavage of pro-A-SMase.