We have previously shown that cyclic AMP (cAMP) inhibits the protein kinase C (PKC)-mediated phosphorylation of myelin basic protein (MBP) in cultured oligodendrocytes (OLGs). Recently, it has been demonstrated that the long chain base sphingosine inhibits PKC by competing PKC effectors (diacylglycerol and phorbol esters) for a binding site on the kinase (Hannun and Bell: Science 235: 670-674, 1987). In this report we define further the mechanism by which cAMP inhibits MBP phosphorylation by comparing the effects of cAMP with that of galactosylsphingosine (psychosine), a potential catabolite of galactocerebroside, the major OLG glycosphingolipid. We identify the consequences of psychosine treatment and PKC down-regulation on OLG morphology and electrophysiology and discuss their relevance. Our results in intact ovine oligodendrocytes are consistent with a mechanism in which cAMP inhibits MBP phosphorylation by interfering with the release of diacylglycerol (DAG) from phosphatidylinositol. First, the effects of cAMP on MBP phosphorylation are reversed with exogenous TPA; and second, cAMP inhibits the incorporation of 1-[14C]arachidonate into DAG and specifically inhibits the turnover (as judged by 32PO4 3-incorporation) of phosphatidylinositol. Psychosine inhibits MBP phosphorylation, and its action can be reversed by TPA suggesting a mechanism of inhibition similar to that described for other systems. In addition, psychosine has profound effects on OLG morphology; it disintegrates OLG processes while leaving the cell soma intact. Stable hyperpolarized resting potentials were obtained following psychosine treatment, but there was a 66% decrease in membrane capacitance indicating a significant decrement in membrane surface area. The morphological changes induced by psychosine are reversible and can be eliminated by removing the drug but not by the addition of TPA. Whether inhibition of PKC by psychosine plays any role in process dissolution remains an unanswered question. However, current evidence suggests that a PKC-independent mechanism may be at play. This investigation in conjunction with our previous work emphasizes a role for the interregulation of protein kinase A (PKA) and PKC in the control of OLG somal vs. myelin components. This may have significant implications for central nervous system myelin assembly.