The mitochondrial matrix enzyme ornithine transcarbamylase (OTC) is synthesized on cytoplasmic polyribosomes as a precursor (pOTC) with an NH2-terminal extension of 32 amino acids. We report here that rat pOTC synthesized in vitro is internalized and cleaved by isolated rat liver mitochondria in two, temporally separate steps. In the first step, which is dependent upon an intact mitochondrial membrane potential, pOTC is translocated into mitochondria and cleaved by a matrix protease to a product designated iOTC, intermediate in size between pOTC and mature OTC. This product is in a trypsin-protected mitochondrial location. The same intermediate-sized OTC is produced in vivo in frog oocytes injected with in vitro-synthesized pOTC. The proteolytic processing of pOTC to iOTC involves the removal of 24 amino acids from the NH2 terminus of the precursor and utilizes a cleavage site two residues away from a critical arginine residue at position 23. In a second cleavage step, also catalyzed by a matrix protease, iOTC is converted to mature OTC by removal of the remaining eight residues of leader sequence. To define the critical regions in the OTC leader peptide required for these events, we have synthesized OTC precursors with alterations in the leader. Substitution of either an acidic (aspartate) or a "helix-breaking" (glycine) amino acid residue for arginine 23 of the leader inhibits formation of both iOTC and OTC, without affecting translocation. These mutant precursors are cleaved at an otherwise cryptic cleavage site between residues 16 and 17 of the leader. Interestingly, this cleavage occurs at a site two residues away from an arginine at position 15. The data indicate that conversion of pOTC to mature OTC proceeds via the formation of a third discrete species: an intermediate-sized OTC. The data suggest further that, in the rat pOTC leader, the essential elements required for translocation differ from those necessary for correct cleavage to either iOTC or mature OTC.