It is shown that a suspension of particles in a partially-filled, horizontal, rotating cylinder is linearly unstable towards axial segregation and an undulation of the free surface at large enough particle concentrations. Relying on the shear-induced diffusion of particles, concentration-dependent viscosity, and the existence of a free surface, our theory provides an explanation of the experiments of Tirumkudulu [Phys. Fluids 11, 507 (1999); 12, 1615 (2000)]. (C) 2001 American Institute of Physics.