Phosphodiesterases (PDEs) hydrolyze the second messengers cyclic adenosine monophosphate (cAMP) and cyclic guanosine 5′-monophosphate (cGMP) and play a crucial role in the termination and spatial segregation of cyclic nucleotide signals. Despite a wealth of molecular information, very little is known about how PDEs regulate cAMP and cGMP signals in living cells because conventional methods lack the necessary spatial and temporal resolution. We present here a sensitive optical method for monitoring cAMP levels and PDE activity near the membrane, using cyclic nucleotide-gated (CNG) ion channels as sensors. These channels are directly opened by the binding of cyclic nucleotides and allow cations to cross the membrane. The olfactory channel A subunit (CNGA2) has been genetically modified to improve its cAMP sensitivity and specificity. Channel activity is assessed by measuring Ca2+ influx using standard fluorometric techniques. In addition to studying PDEs in their native setting, the approach should be particularly useful in high-throughput screening assays to test for compounds that affect PDE activity, as well as the activities of the many G protein-coupled receptors that cause changes in intracellular cAMP.