Beta-APP cleaving enzyme (BACE) is responsible for the first of two proteolytic cleavages of the APP protein that together lead to the generation of the Alzheimer's disease-associated Abeta peptide. It is widely believed that halting the production of Abeta peptide, by inhibition of BACE, is an attractive therapeutic modality for the treatment of Alzheimer's disease. BACE is an aspartyl protease, and there is significant effort in the pharmaceutical community to apply traditional design methods to the development of active site-directed inhibitors of this enzyme. We report here the discovery of a ligand binding pocket within the catalytic domain of BACE that is distinct from the enzymatic active site (i.e., an exosite). Peptides, initially identified from combinatorial phage peptide libraries, contain the sequence YPYF(I/L)P(L/I) and bind specifically to this exosite, even in the presence of saturating concentrations of active site-directed inhibitors. Binding of peptides to the BACE exosite leads to a concentration-dependent inhibition of proteolysis for APP-related, protein-based substrates of BACE. The discovery of this exosite opens new opportunities for the identification and development of novel and potentially selective small molecule inhibitors of BACE that act through exosite, rather than active site, binding interactions.