The NFkappaB1 gene encodes two functionally distinct proteins termed p50 and p105. p50 corresponds to the N terminus of p105 and with p65 (RelA) forms the prototypical NF-kappaB transcription factor complex. In contrast, p105 functions as a Rel-specific inhibitor (IKB) and has been proposed to be the precursor of p50. Our studies now demonstrate that p50 is generated by a unique cotranslational processing event involving the 26S proteasome, whereas cotranslational folding of sequences near the C terminus of p50 abrogates proteasome processing and leads to p105 production. These results indicate that p105 is not the precursor of p50 and reveal a novel mechanism of gene regulation that ensures the balanced production and independent function of the p50 and p105 proteins.