The 4-kDa beta-amyloid peptide (Abeta), a principal component of parenchymal amyloid deposits in Alzheimer's disease, is derived from amyloid precursor proteins (APP). To identify potential intracellular compartments involved in Abeta production, we expressed human APP-695 (APPwt) and APP-695 harboring the Swedish double mutation (APPswe) associated with familial early-onset Alzheimer's disease, in mouse N2a cells. We demonstrate that cells expressing APPswe secrete high levels of Abeta peptides and beta-secretase-generated soluble APP derivatives (APP s beta) relative to cells expressing APPwt. In addition, we observed a concomitant diminution in the levels of alpha-secretase-generated soluble APP derivatives (APP s alpha). Our interpretation of these findings is that beta-secretase cleavage occurs in an intracellular compartment and disables those substrates which would normally be cleaved by alpha-secretase. As anticipated, the levels of APPswe are diminished relative to the steady-state levels of surface-bound APPwt; moreover, surface-bound APPswe and APPwt molecules are released from the plasma membrane after cleavage by alpha-secretase, but not by beta-secretase. Finally, by examining the rate of appearance of specific APP metabolites generated by beta-secretase, we now unequivocally demonstrate that beta-secretase cleavage of APPswe occurs within the Golgi apparatus, as early as the medial compartment.