The Alzheimer's disease beta-amyloid peptide (Abeta) is produced by excision from the type 1 integral membrane glycoprotein amyloid precursor protein (APP) by the sequential actions of beta- and then gamma-secretases. Here we report that Asp 2, a novel transmembrane aspartic protease, has the key activities expected of beta-secretase. Transient expression of Asp 2 in cells expressing APP causes an increase in the secretion of the N-terminal fragment of APP and an increase in the cell-associated C-terminal beta-secretase APP fragment. Mutation of either of the putative catalytic aspartyl residues in Asp 2 abrogates the production of the fragments characteristic of cleavage at the beta-secretase site. The enzyme is present in normal and Alzheimer's disease (AD) brain and is also found in cell lines known to produce Abeta. Asp 2 localizes to the Golgi/endoplasmic reticulum in transfected cells and shows clear colocalization with APP in cells stably expressing the 751-amino-acid isoform of APP.