Buoyant membrane fractions containing presenilin 1 (PS1), an essential component of the γ-secretase complex, and APP CTFβ, a γ-secretase substrate, can be isolated from cultured cells and brain by several different fractionation procedures that are compatible with in vitro γ-secretase assays. Analysis of these gradients for amyloid β protein (Aβ) and CTFγ production indicated that γ-secretase activity is predominantly localized in these buoyant membrane microdomains. Consistent with this localization, we find that γ-secretase activity is cholesterol dependent. Depletion of membrane cholesterol completely inhibits γ-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 Aβ within cholesterol rich membrane microdomains.