The intramembrane aspartyl protease gamma-secretase plays a fundamental role in several signaling pathways involved in cellular differentiation and has been linked with a variety of human diseases, including Alzheimer's disease. Here, we describe a transgenic Drosophila model for in vivo-reconstituted gamma-secretase, based on expression of epitope-tagged versions of the four core gamma-secretase components, Presenilin, Nicastrin, Aph-1, and Pen-2. In agreement with previous cell culture and yeast studies, coexpression of these four components promotes the efficient assembly of mature, proteolytically active gamma-secretase. We demonstrate that in vivo-reconstituted gamma-secretase has biochemical properties and a subcellular distribution resembling those of endogenous gamma-secretase. However, analysis of the cleavage of alternative substrates in transgenic-fly assays revealed unexpected functional differences in the activity of reconstituted gamma-secretase toward different substrates, including markedly reduced cleavage of some APP family members compared to cleavage of the Notch receptor. These findings indicate that in vivo under physiological conditions, additional factors differentially modulate the activity of gamma-secretase toward its substrates. Thus, our approach for the first time demonstrates the overall functionality of reconstituted gamma-secretase in a multicellular organism and the requirement for substrate-specific factors for efficient in vivo cleavage of certain substrates.