Despite its growing use as a radiological indicator of neuronal viability, the biological function of N-acetylaspartate (NAA) has remained elusive. This is due in part to its unusual metabolic compartmentalization wherein the synthetic enzyme occurs in neuronal mitochondria whereas the principal metabolizing enzyme, N-acetyl-L-aspartate amidohydrolase (aspartoacylase), is located primarily in white matter elements. This study demonstrates that within white matter, aspartoacylase is an integral component of the myelin sheath where it is ideally situated to produce acetyl groups for synthesis of myelin lipids. That it functions in this manner is suggested by the fact that myelin lipids of the rat optic system are well labeled following intraocular injection of [14C-acetyl]NAA. This is attributed to uptake of radiolabeled NAA by retinal ganglion cells followed by axonal transport and transaxonal transfer of NAA into myelin, a membrane previously shown to contain many lipid synthesizing enzymes. This study identifies a group of myelin lipids that are so labeled by neuronal [14C]NAA, and demonstrates a different labeling pattern from that produced by neuronal [14C]acetate. High performance liquid chromatographic analysis of the deproteinated soluble materials from the optic system following intraocular injection of [14C]NAA revealed only the latter substance and no radiolabeled acetate, suggesting little or no hydrolysis of NAA within mature neurons of the optic system. These results suggest a rationale for the unusual compartmentalization of NAA metabolism and point to NAA as a neuronal constituent that is essential for the formation and/or maintenance of myelin. The relevance of these findings to Canavan disease is discussed.