The amyloid beta (A beta) peptide that accumulates in Alzheimer's disease brain is derived from the proteolytic processing of the amyloid precursor protein by beta- and gamma-secretase activities. The beta-secretase enzyme beta-site amyloid precursor protein-cleaving enzyme (BACE) generates the N terminus of A beta by cleavage at either Asp(1) (beta-site) or Glu(11) (beta'-site), ultimately leading to the production of full-length A beta 1-40/42 or truncated A beta 11-40/42. The functional significance of this variable cleavage site specificity as well as the relative pathological impact of full-length versus N-terminally truncated A beta remains largely unknown. In our analysis of BACE reactivity in cell culture, we found that the preference of the protease for either beta- or beta'-cleavage was strongly dependent on intracellular localization. Within the endoplasmic reticulum, beta-site proteolysis predominated, whereas in the trans-Golgi network, beta'-cleavage was favored. Furthermore, the contrasting cleavage site specificities of BACE were not simply due to differences in organelle pH or the oligosaccharide composition of the glycoproteins involved. Examination of post-mortem brain specimens revealed significant levels of A beta 11-40/42 within insoluble amyloid pools. Taken together, these data support an important role for beta'-cleavage in the process of cerebral amyloid deposition and localize the processing event to the trans-Golgi network.