Peptidylglycine alpha-amidating monooxygenase (PAM) catalyzes the COOH-terminal alpha-amidation of neural and endocrine peptides via a two-step reaction carried out in sequence by the monooxygenase and lyase domains contained in this bifunctional protein. Peptide alpha-amidation is thought to take place primarily in the secretory granules in which mature bioactive peptides are stored, and it is not known where in the secretory compartment newly synthesized PAM protein becomes enzymatically active. To address this question, PAM-3, a soluble bifunctional protein, was modified by addition of the KDEL endoplasmic reticulum (ER) retention/retrieval signal to its COOH terminus. PAM-3-KDEL protein stably expressed in hEK-293 cells or in AtT-20 cells was efficiently retained in the ER based on immunocytochemistry, pulse-chase experiments, and maintained endoglycosidase H sensitivity. The effect of the KDEL sequence was specific since PAM-3 with an inactive ER retention/retrieval signal (PAM-3-KDEV) moved through the secretory pathway like wild type PAM-3. In AtT-20 cells, PAM-3-KDEL was not subjected to the COOH-terminal endoproteolytic cleavage that generates a 75-kDa PAM protein from PAM-3 and PAM-3-KDEV. PAM-3-KDEL protein exhibited both monooxygenase and lyase activities with specific activities similar to those of the wild type PAM-3 and PAM-3-KDEV proteins. Thus, although PAM catalyzes a reaction that occurs primarily in the secretory granules, newly synthesized PAM protein becomes enzymatically competent in the ER.