Mitochondrial damage in the cells comprising inner (retinal endothelial cells) and outer (retinal pigment epithelium (RPE)) blood–retinal barriers (BRB) is known to precede the initial BRB breakdown and further histopathological abnormalities in diabetic retinopathy (DR). We previously demonstrated that activation of acid sphingomyelinase (ASM) is an important early event in the pathogenesis of DR, and recent studies have demonstrated that there is an intricate connection between ceramide and mitochondrial function. This study aimed to determine the role of ASM-dependent mitochondrial ceramide accumulation in diabetes-induced RPE cell damage. Mitochondria isolated from streptozotocin (STZ)-induced diabetic rat retinas (7 weeks duration) showed a 1.64 ± 0.29-fold increase in the ceramide-to-sphingomyelin ratio compared to controls. Conversely, the ceramide-to-sphingomyelin ratio was decreased in the mitochondria isolated from ASM-knockout mouse retinas compared to wild-type littermates, confirming the role of ASM in mitochondrial ceramide production. Cellular ceramide was elevated 2.67 ± 1.07-fold in RPE cells derived from diabetic donors compared to control donors, and these changes correlated with increased gene expression of IL-1β, IL-6, and ASM. Treatment of RPE cells derived from control donors with high glucose resulted in elevated ASM, vascular endothelial growth factor (VEGF), and intercellular adhesion molecule 1 (ICAM-1) mRNA. RPE from diabetic donors showed fragmented mitochondria and a 2.68 ± 0.66-fold decreased respiratory control ratio (RCR). Treatment of immortalized cell in vision research (ARPE-19) cells with high glucose resulted in a 25% ± 1.6% decrease in citrate synthase activity at 72 h. Inhibition of ASM with desipramine (15 μM, 1 h daily) abolished the decreases in metabolic functional parameters. Our results are consistent with diabetes-induced increase in mitochondrial ceramide through an ASM-dependent pathway leading to impaired mitochondrial function in the RPE cells of the retina.