Release of A peptides from -amyloid precursor protein (APP) requires sequential cleavage by two endopeptidases, -and ␥-secretases. -Secretase was recently identified as a novel membrane-bound aspartyl protease, named BACE1, Asp2, or memapsin 2. Employing confocal microscopy and subcellular fractionation, we have found that BACE1 is largely situated in the distal Golgi membrane with a minor presence in the endoplasmic reticulum, endosomes, and plasma membrane in human neuroblastoma SHEP cells and in mouse Neuro-2a cell lines expressing either endogenous mouse BACE1 or additional exogenous human BACE1. The major cellular -secretase activity is located in the late Golgi apparatus, consistent with its cellular localization. Furthermore, we demonstrate that the single transmembrane domain of BACE1 alone determines the retention of BACE1 to the Golgi compartments, through examination of recombinant proteins of various BACE1 fragments fused to a reporter green fluorescence protein. In addition, we show that the transmembrane domain of BACE1 is required for the access of BACE1 enzymatic activity to the cellular APP substrate and hence for the optimal generation of the C-terminal fragment of APP (CTF99). The results suggest a molecular and cell biological mechanism for the regulation of -secretase activity in vivo.The pathological hallmarks of Alzheimer's disease are neuritic plaques and neurofibrillary tangles (see reviews in Refs. 1-3). The neuritic plaques, also known as senile plaques, are predominantly composed of A, a cluster of aggregated and heterogeneous peptides of 39 -43 amino acids (4). The most pathogenic A peptide is the less soluble 42-amino acid peptide (A 42 ), although the concentration of A 40 is generally much higher than A 42 . Excision of A peptides from their amyloid precursor protein requires sequential proteolytic cleavages by the -and ␥-secretases, respectively. -secretase cleaves APP 1 to produce two major components: secreted ectodomain sAPP  and the C-terminal fragment CTF99. The latter can be further cleaved by ␥-secretase to release A. Genetic linkage analysis suggests that increased total A levels or an increase in the ratio of A 42 /A 40 is associated with the severity of AD dementia (reviewed in Refs.