Interleukin (IL)-1beta maturation is accomplished by caspase-1-mediated proteolysis, an essential element of innate immunity. NLRs constitute a recently recognized family of caspase-1-activating proteins, which contain a nucleotide-binding oligomerization domain and leucine-rich repeat (LRR) domains and which assemble into multiprotein complexes to create caspase-1-activating platforms called "inflammasomes." Using purified recombinant proteins, we have reconstituted the NALP1 inflammasome and have characterized the requirements for inflammasome assembly and caspase-1 activation. Oligomerization of NALP1 and activation of caspase-1 occur via a two-step mechanism, requiring microbial product, muramyl-dipeptide, a component of peptidoglycan, followed by ribonucleoside triphosphates. Caspase-1 activation by NALP1 does not require but is enhanced by adaptor protein ASC. The findings provide the biochemical basis for understanding how inflammasome assembly and function are regulated, and shed light on NALP1 as a direct sensor of bacterial components in host defense against pathogens.