gamma-Secretase is a membrane-associated endoprotease that catalyzes the final step in the processing of Alzheimer's beta-amyloid precursor protein (APP), resulting in the release of amyloid beta-peptide (Abeta). The molecular identity of gamma-secretase remains in question, although recent studies have implicated the presenilins, which are membrane-spanning proteins localized predominantly in the endoplasmic reticulum (ER). Based on these observations, we have tested the hypothesis that gamma-secretase cleavage of the membrane-anchored C-terminal stump of APP (i.e. C99) occurs in the ER compartment. When recombinant C99 was expressed in 293 cells, it was localized mainly in the Golgi apparatus and gave rise to abundant amounts of Abeta. Co-expression of C99 with mutant forms of presenilin-1 (PS1) found in familial Alzheimer's disease resulted in a characteristic elevation of the Abeta(42)/Abeta(40) ratio, indicating that the N-terminal exodomain of APP is not required for mutant PS1 to influence the site of gamma-secretase cleavage. Biogenesis of both Abeta(40) and Abeta(42) was almost completely eliminated when C99 was prevented from leaving the ER by addition of a di-lysine retention motif (KKQN) or by co-expression with a dominant-negative mutant of the Rab1B GTPase. These findings indicate that the ER is not a major intracellular site for gamma-secretase cleavage of C99. Thus, by inference, PS1 localized in this compartment does not appear to be active as gamma-secretase. The results suggest that presenilins may acquire the characteristics of gamma-secretase after leaving the ER, possibly by assembling with other proteins in peripheral membranes.