The effect of cholesterol incorporation on some functions of the mitochondrial inner membrane and on the morphology of rat liver mitochondria was studied. Basal ATPase and succinate dehydrogenase activities remained unchanged after cholesterol was incorporated into the mitochondria; however, uncoupled ATPase activity was partially inhibited. The presence of several substrates and inhibitors did not change the amount of cholesterol incorporated, which was localized mostly in the outer membrane. Electron-microscope observations revealed the presence of vesicles between the outer and inner membranes; these vesicles increased in number with the amount of cholesterol incorporated. The data suggest that cholesterol induces the formation of vesicles from the outer membrane, and modifies the activity of stimulated ATPase.