The thermotropic phase behavior of cholesterol monohydrate in water was investigated by differential scanning calorimetry, polarizing light microscopy, and x-ray diffraction. In contrast to anhydrous cholesterol which undergoes a polymorphic crystalline transition at 39 degrees C and a crystalline to liquid transition at 151 degrees C, the closed system of cholesterol monohydrate and water exhibited three reversible endothermic transitions at 86, 123, and 157 degrees C. At 86 degrees C, cholesterol monohydrate loses its water of hydration, forming the high temperature polymorph of anhydrous cholesterol. At least 24 hours were required for re-hydration of cholesterol and the rate of hydration was dependent on the polymorphic crystalline form of anhydrous cholesterol. At 123 degrees C, anhydrous crystalline cholesterol in the presence of excess water undergoes a sharp transition to a birefringent liquid crystalline phase of smectic texture. The x-ray diffraction pattern obtained from this phase contained two sharp low-angle reflections at 37.4 and 18.7 A and a diffuse wide-angle reflection centered at 5.7 A, indicating a layered smectic type of liquid crystalline structure with each layer being two cholesterol molecules thick. The liquid crystalline phase is stable over the temperature range of 123 to 157 degrees C before melting to a liquid dispersed in water. The observation of a smectic liquid crystalline phase for hydrated cholesterol correlates with its high surface activity and helps to explain its ability to exist in high concentrations in biological membranes.