Human B-lymphoblastoid cell lines (B-LCL) incubated with the protease inhibitor leupeptin accumulate complexes of class II HLA antigens with a series of Mr 21,000-23,000 basic proteins termed leupeptin-induced proteins (LIP). The appearance of class II antigen-associated LIP coincides with the disappearance of class II antigen-associated invariant (I) chain. Glycopeptides generated by in vitro proteolysis of LIP and I chain using Staphylococcus aureus V8 protease are identical as determined by electrophoresis in sodium dodecyl sulfate. These results suggest that LIP is a proteolytic product derived from the I chain and are consistent with the view that further in vivo proteolysis of LIP by a leupeptin-sensitive enzyme normally facilitates its release from class II antigens. Incubation of B-LCL with monensin, which traps class II antigens and associated I chain in the Golgi apparatus, or chloroquine, which neutralizes intracellular acidic compartments and inhibits I-chain dissociation, blocks the leupeptin-induced appearance of LIP. Treatment of LIP with endoglycosidases F and H shows that both of its N-linked oligosaccharides are in the complex form, indicating that proteolysis of class II antigen-associated I chain to generate LIP occurs in a late-Golgi or post-Golgi compartment. The compartment in which these proteolytic events occur may be identical to the site in macrophages and B lymphocytes where foreign antigens are processed and interact with class II HLA molecules.