Alzheimer's disease is characterized by brain deposition of extracellular amyloid β‐peptide (Aβ)‐containing plaques. The cellular site of γ‐secretase activity, which releases Aβ and the corresponding amyloid precursor protein intracellular domain (AICD), remains controversial. Proposed cleavage sites range from the endoplasmic reticulum (ER), the Golgi apparatus, and the cell surface to endosomal compartments. We now used C99‐green fluorescent protein (GFP), a fluorescent reporter substrate for γ‐secretase activity and monitored AICD production in living cells. C99‐GFP is efficiently cleaved by γ‐secretase, and AICD‐GFP is released into the cytosol. Inhibiting γ‐secretase results in accumulation of C99‐GFP in early endosomes. By blocking selective transport steps along the secretory pathway, we demonstrate that γ‐secretase does not cleave its substrates in the ER, the Golgi/trans‐Golgi network, or in secretory vesicles. In contrast, inhibition of endocytosis did not inhibit cleavage of C99‐GFP. Similar results were obtained for another γ‐secretase substrate, NotchΔE. Our results suggest that intracellular domains are generated by γ‐secretase at the plasma membrane and/or early endosomes.