The deposition of amyloid-beta peptides (Abeta) in senile plaques (SPs) is a central pathological feature of Alzheimer's disease (AD). Since SPs are composed predominantly of Abeta1-42, which is more amyloidogenic in vitro, the enzymes involved in generating Abeta1-42 may be particularly important to the pathogenesis of AD. In contrast to Abeta1-40, which is generated in the trans-Golgi network and other cytoplasmic organelles, intracellular Abeta1-42 is produced in the endoplasmic reticulum/intermediate compartment (ER/IC), where it accumulates in a stable insoluble pool. Since this pool of insoluble Abeta1-42 may play a critical role in AD amyloidogenesis, we sought to determine how the production of intracellular Abeta is regulated. Surprisingly, the production of insoluble intracellular Abeta1-42 was increased by a putative gamma-secretase inhibitor as well as by an inhibitor of the proteasome. We further demonstrate that this increased generation of Abeta1-42 in the ER/IC is due to a reduction in the turnover of Abeta-containing APP C-terminal fragments. We conclude that the proteasome is a novel site for degradation of ER/IC-generated APP fragments. Proteasome inhibitors may augment the availability of APP C-terminal fragments for gamma-secretase cleavage and thereby increase production of Abeta1-42 in the ER/IC. Based on the organelle-specific differences in the generation of Abeta by gamma-secretase, we conclude that intracellular ER/IC-generated Abeta1-42 and secreted Abeta1-40 are produced by different gamma-secretases. Further, the fact that a putative gamma-secretase inhibitor had opposite effects on the production of secreted and intracellular Abeta may have important implications for AD drug design.