All retroviruses studied thus far contain proteases which process viral precursors to liberate the structural and enzymatic proteins of the viral capsid. We have examined the processing of the Gag precursor of HIV-1 which is composed of the viral structural proteins. Our results indicate that Gag is processed via two pathways: an expected membrane-associated pathway which gives rise to virions and a cytoplasmic pathway in which processed viral proteins accumulate in the cytoplasm. The presence of an active protease in the cytoplasm of infected cells is a potential source of toxicity. A comparison of the extent of cytoplasmic processing in lytically infected cells compared with that in cells which are not killed by the virus demonstrates a close correlation between cytoplasmic processing and cell killing.