Proteolytic processing of the beta-amyloid precursor proteins (APP) is required for release of the beta/A4 protein and its deposition into the amyloid plaques characteristic of aging and Alzheimer's disease. We have examined the involvement of acidic intracellular compartments in APP processing in cultured human cells. The use of acidotropic agents and inhibitors to a specific class of lysosomal protease, coupled with metabolic labeling and immunoprecipitation, revealed that APP is degraded within an acidic compartment to produce at least 12 COOH-terminal fragments. Nine likely contain the entire beta/A4 domain and, therefore, are potentially amyloidogenic. Treatment with E64 or Z-Phe-Ala-CHN2 irreversibly blocked activities of the lysosomal cysteine proteases cathepsins B and L but did not inhibit the lysosomal aspartic protease cathepsin D and did not alter the production of potentially amyloidogenic fragments. Instead, the inhibitors prevented further degradation of the fragments. Thus, large numbers of potentially amyloidogenic fragments of APP are routinely generated in an acidic compartment by noncysteine proteases and then are eliminated within lysosomes by cysteine proteases. Immunoblot and immunohistochemical analyses confirmed that chronic cysteine protease inhibition leads to accumulation of potentially amyloidogenic APP fragments in lysosomes. The results provide further support for the hypothesis that an acidic compartment may be involved in amyloid formation and begin to define the proteolytic events that may be important for amyloidogenesis.