Cell surface isoforms of meprin A (EC 3.4.24.18) from mice and rats contain beta subunits that are type I integral membrane proteins and alpha subunits that are disulfide linked to or noncovalently associated with membrane-anchored meprin subunits. Both alpha and beta subunits are synthesized with COOH-terminal domains predicted to be cytoplasmic, transmembrane, and epidermal growth factor-like; these domains are retained in beta subunits but are removed from alpha during maturation. The present studies establish that an inserted 56-amino acid domain (the ''I'' domain), present in alpha but not in beta, is necessary and sufficient for COOH-terminal proteolytic processing of the alpha subunit. This was demonstrated by expression of mutant meprin subunits (deletion mutants, chimeric alpha beta subunits, and beta mutants containing the I domain) in COS-1 cells. Mutations of two common processing sites present in the I domain (a dibasic site and a furin site) did not prevent COOH-terminal proteolytic processing, indicating that the proteases responsible for cleavage are distinct from those having these specificities, Deletion of the I domain from the alpha subunit resulted in accumulation of unprocessed subunits in a preGolgi compartment. Furthermore, COOH-terminal proteolytic processing of wild-type alpha subunits occurred before acquisition of endoglycosidase H resistance. Pulse chase experiments and expression of an alpha subunit transcript containing a c-myc epitope tag, confirmed that proteolytic lytic processing at the COOH terminus occurs in the endoplasmic reticulum. This work identifies the region of the alpha subunit that is essential for COOH-terminal processing and demonstrates that the differential processing of the evolutionarily-related subunits of meprin A that results in a structurally unique tetrameric protease begins in the endoplasmic reticulum.