To study the pathway of degradation of the hepatitis B virus (HBV) middle envelope protein (M), human hepatoblastoma cells were transfected with a plasmid that specifies production of M in the absence of other viral proteins. When expressed in HepG2 cells, 90% of M protein was secreted into the culture media within a 24-h period. However, quite surprisingly, 10% of this protein remained cell associated and was only slowly degraded over a 24-48-h period. Treatment with inhibitors of the cytosolic proteasome complex resulted in the accumulation of full-length HBV M protein and M derived HBV-specific polypeptides of 20 and 17 kDa. Treatment with the endoglycosidases PNGase F and Endo H, confirmed that the two species were derived from a similar polypeptide with a N-linked glycan modification. Evidence that this peptide was derived from a proteolytic processing event was determined through the detection of the C-terminal fragment using a C-terminal tagged HA tagged construct. The hypothesis that the 20 and 17 kDa polypeptide species are intermediates of M degradation was reinforced by their detection in cells transfected with vectors specifying M secretion defective mutants that accumulate intracellular M. Moreover, deletion of a putative cleavage sites prevented the detection of the 20 and 17 kDa species, consistent with the notion that they are generated by the action of a cellular protease prior to proteasomal degradation. Thus, these results highlight an important way in which large protein aggregates, such as the HBsAg can be processed for efficient degradation via the proteasomes and allow for proper antigen presentation via the MHC I pathway.