Buoyant membrane fractions containing presenilin 1 (PS1), an essential component of the gamma-secretase complex, and APP CTFbeta, a gamma-secretase substrate, can be isolated from cultured cells and brain by several different fractionation procedures that are compatible with in vitro gamma-secretase assays. Analysis of these gradients for amyloid beta protein (Abeta) and CTFgamma production indicated that gamma-secretase activity is predominantly localized in these buoyant membrane microdomains. Consistent with this localization, we find that gamma-secretase activity is cholesterol dependent. Depletion of membrane cholesterol completely inhibits gamma-secretase cleavage, which can be restored by cholesterol replacement. Thus, altering cholesterol levels may influence the development of Alzheimer's disease (AD) by influencing production and deposition of Abeta within cholesterol rich membrane microdomains.