The subcellular distribution and targeting of the non-lysosomal aspartic proteinase cathepsin E have been studied using mouse L cells and monkey Cos 1 cells that were transfected with cDNA encoding cathepsin E. The cathepsin E was retained in L cells for at least 20 h without significant degradation and its single N-linked oligosaccharide remained sensitive to endo-beta-N-acetyl-glucosaminidase H. When cathepsin E was overexpressed by transient transfection in Cos 1 cells, it was very slowly secreted into the media. The intracellular form of the enzyme contained a high mannose oligosaccharide which was processed to a complex type species upon secretion. In double label immunofluorescence studies, cathepsin E co-localized with cathepsin D-myc-KDEL, an endoplasmic reticulum (ER) marker. Subcellular fractionation on a Percoll density gradient showed that the cathepsin E co-migrated with membranous vesicles that were distinct from dense lysosomes. Only a trace amount of the enzyme was recovered in the soluble fraction. These findings indicate that in L cells and Cos 1 cells, the intracellular location of cathepsin E is the endoplasmic reticulum. To identify the protein sequences required for ER retention, we made chimeric proteins between cathepsin E and pepsinogen, an aspartic proteinase that is rapidly secreted by Cos 1 cells. We found that amino acids 1-48 of cathepsin E are important for its retention in the ER. Within this region, Cys7, which is involved in covalent dimer formation, plays a significant role in the retention.