Mammalian cells can not survive without cholesterol . Cholesterol is found in the outer wall (cell membrane) of all cells in the body. It is also found in internal membranes that surround both the mitochondria and the lysosomes (highly acidic containers of digestive enzymes). To understand how cholesterol works, you need to know something about the structure of cell membranes. All cell membranes are built from a so-called lipid bilayer, as illustrated in the figure to the right. The lipid bilayer contains two parallel chains of phospholipids (the same phospholipids that encase LDL particles, the so-called "bad" cholesterol). Phospholipids have the unique property that one end of the molecule is hydrophobic (water insoluble) and the other is hydrophilic (water soluble). The two chains in the lipid bilayer orient themselves such that the hydrophobic sides of both layers are adjoining in the center of the membrane. This central hydrophobic layer thus contains fatty acids that are vulnerable to oxidative damage. The outer parts, facing both the exterior and the interior of the cell, are water-soluble. Cholesterol molecules are dispersed throughout the membrane at strategic locations.
An article published in 2009 by Kucerka et al.  nicely sums up several known roles of cholesterol in membranes: "Cholesterol is found in all animal cell membranes and is required for proper membrane permeability and fluidity. It is also needed for building and maintaining cell membranes, and may act as an antioxidant. Recently, cholesterol has also been implicated in cell signaling processes, and is suggested to enable lipid raft formation in the plasma membrane." [Ibid, p. 16358] The article goes on to describe how cholesterol is able to orient itself within the membrane either vertically (bridging across the membrane) or horizontally (sequestered within the hydrophobic central space of the membrane lipid bilayer). How it is oriented depends upon the degree to which the fatty acids in the membrane are saturated, with saturated fatty acids greatly favoring the vertical over the horizontal orientation. Cholesterol can also flip easily from one side of the bilayer to the other. All of this flexibility in its orientation within the membrane allows it to operate effectively as a signaling molecule.
A fascinating article written by Thomas Haines in 2001 proposes a novel but compelling role for cholesterol in protecting the cell membrane from sodium leaks . All mammalian cells maintain an ion gradient across their outer wall, which is utilized to fuel cell chemical processes. The so-called sodium pump is an active process that constantly pumps sodium out of the cell to maintain this charge difference. The pump consumes ATP in the process. Working against the pump is a passive leakage mechanism that causes sodium to drift back into the cell. To the extent that the membrane can be constructed to resist leakage (kind of like putting insulation in the attic of a house), it will require less ATP to maintain sodium concentrations appropriate for the cell to function properly.
The Haines article argues that cholesterol plays an essential role in protecting the cell wall from sodium leakage. Sodium leakage is a much bigger problem (it leaks 7 to 11 times as fast in the absence of cholesterol) for unsaturated fatty acids as for saturated fatty acids . However, unsaturated fatty acids also encourage cholesterol to arrange itself in the central layer. By accumulating there, it provides extra insulation preventing the charged sodium ions from passively hopping from the exterior to the interior of the cell. Other experiments  have shown that the relative sodium leakage rates are reduced by 300% in the presence of cholesterol.