One of the hallmarks of Alzheimer's disease is the cerebral deposition of plaques composed of a 37-43 amino acid amyloid-beta (Abeta) peptide. Abeta is produced by the sequential proteolytic cleavage of an integral-membrane protein, amyloid beta-protein precursor (AbetaPP), first by beta-secretase (BACE), and then by gamma-secretase, a complex containing presenilin and Nicastrin. Although these cleavages were originally documented to occur in the endosomal/ lysosomal system, other lines of evidence suggest that the responsible proteins and activity reside in the ER or Golgi. This lack of intracellular co-localization of enzyme and substrate has been referred to as the spatial paradox of Alzheimer's disease. Here we will review the biology of the lysosome and the literature supporting the endosomal/ lysosomal production of Abeta. We will also examine some of the data supporting Abeta production in the biosynthetic compartments and demonstrate its compatibility with an endosomal/ lysosomal model. Finally, we will discuss the possible role of the acidic environment of the lysosome in the amyloidogenic process, and review the evidence for intracellular amyloidogenesis preceding amyloid plaque formation.