Several cell surface eukaryotic proteins have a glycosylphosphatidylinositol (GPI) modification at the Cterminal end that serves as their sole means of membrane anchoring. Using fluorescently labeled ligands and digital fluorescence microscopy, we show that contrary to the potocytosis model, GPI-anchored proteins are internalized into endosomes that contain markers for both receptor-mediated uptake (e.g. transferrin) and fluid phase endocytosis (e.g. dextrans). This was confirmed by immunogold electron microscopy and the observation that a fluorescent folate derivative bound to the GPI-anchored folate receptor is internalized into the same compartment as co-internalized horseradish peroxidase-transferrin; the folate fluorescence was quenched when cells subsequently were incubated with diaminobenzidine and H2O2. Most of the GPI-anchored proteins are recycled back to the plasma membrane but at a rate that is at least 3-fold slower than C6-NBD-sphingomyelin or recycling receptors. This endocytic retention is regulated by the level of cholesterol in cell membranes; GPI-anchored proteins are recycled back to the cell surface at the same rate as recycling transferrin receptors and C6-NBD-sphingomyelin in cholesterol-depleted cells. Cholesterol-dependent endocytic sorting of GPI-anchored proteins is consistent with the involvement of specialized lipid domains or 'rafts' in endocytic sorting. These results provide an alternative explanation for GPI-requiring functions of some GPI-anchored proteins.