Proteolytic processing of amyloid precursor protein (APP) by beta- and gamma-secretases generates beta-amyloid (Abeta) peptides, which accumulate in the brains of individuals affected by Alzheimer disease. Detergent-resistant membrane microdomains (DRM) rich in cholesterol and sphingolipid, termed lipid rafts, have been implicated in Abeta production. Previously, we and others reported that the four integral subunits of the gamma-secretase associate with DRM. In this study we investigated the mechanisms underlying DRM association of gamma-secretase subunits. We report that in cultured cells and in brain the gamma-secretase subunits nicastrin and APH-1 undergo S-palmitoylation, the post-translational covalent attachment of the long chain fatty acid palmitate common in lipid raft-associated proteins. By mutagenesis we show that nicastrin is S-palmitoylated at Cys(689), and APH-1 is S-palmitoylated at Cys(182) and Cys(245). S-Palmitoylation-defective nicastrin and APH-1 form stable gamma-secretase complexes when expressed in knock-out fibroblasts lacking wild type subunits, suggesting that S-palmitoylation is not essential for gamma-secretase assembly. Nevertheless, fractionation studies show that S-palmitoylation contributes to DRM association of nicastrin and APH-1. Moreover, pulse-chase analyses reveal that S-palmitoylation is important for nascent polypeptide stability of both proteins. Co-expression of S-palmitoylation-deficient nicastrin and APH-1 in cultured cells neither affects Abeta40, Abeta42, and AICD production, nor intramembrane processing of Notch and N-cadherin. Our findings suggest that S-palmitoylation plays a role in stability and raft localization of nicastrin and APH-1, but does not directly modulate gamma-secretase processing of APP and other substrates.