Cell surface isoforms of meprin A (EC 3.4.24.18) from mice and rats contain beta subunits that are type I integral membrane proteins and alpha subunits that are disulfide-linked to or noncovalently associated with membrane-anchored meprin subunits. Both alpha and beta subunits are synthesized with COOH-terminal domains predicted to be cytoplasmic, transmembrane, and epidermal growth factor-like; these domains are retained in beta subunits but are removed from alpha during maturation. The present studies establish that an inserted 56-amino acid domain (the "I" domain), present in alpha but not in beta, is necessary and sufficient for COOH-terminal proteolytic processing of the alpha subunit. This was demonstrated by expression of mutant meprin subunits (deletion mutants, chimeric alpha beta subunits, and beta mutants containing the I domain) in COS-1 cells. Mutations of two common processing sites present in the I domain (a dibasic site and a furin site) did not prevent COOH-terminal proteolytic processing, indicating that the proteases responsible for cleavage are distinct from those having these specificities. Deletion of the I domain from the alpha subunit resulted in accumulation of unprocessed subunits in a preGolgi compartment. Furthermore, COOH-terminal proteolytic processing of wild-type alpha subunits occurred before acquisition of endoglycosidase H resistance. Pulse-chase experiments and expression of an alpha subunit transcript containing a c-myc epitope tag, confirmed that proteolytic processing at the COOH terminus occurs in the endoplasmic reticulum. This work identifies the region of the alpha subunit that is essential for COOH-terminal processing and demonstrates that the differential processing of the evolutionarily-related subunits of meprin A that results in a structurally unique tetrameric protease begins in the endoplasmic reticulum.