Cerebral deposition of beta-amyloid protein is a pathological feature central to Alzheimer's disease. Production of beta-amyloid by proteolytic processing of the beta-amyloid precursor protein (beta APP) is a critical initial step in beta-amyloidogenesis. We use an inhibitor of beta APP processing to block beta-amyloid peptide formation. Application of the inhibitor to cultured cells results in an accumulation of proteolytic intermediates of beta APP, enabling a precursor-product relationship between beta APP carboxy-terminal fragments and beta-amyloid peptides to be demonstrated directly. In the presence of inhibitor, these amyloidogenic carboxy-terminal fragments can be degraded to nonamyloidogenic products. The catabolism of beta APP carboxy-terminal intermediates and the formation of beta-amyloid peptides are likely to involve an early endosomal compartment as the subcellular site of processing.