In Alzheimer’s disease (AD), the neuropathologic hallmarks of β-amyloid deposition and neurofibrillary degeneration are associated with early and progressive pathology of the endosomal–lysosomal system. Abnormalities of autophagy, a major pathway to lysosomes for protein and organelle turnover, include marked accumulations of autophagy-related vesicular compartments (autophagic vacuoles or AVs) in affected neurons. Here, we investigated the possibility that AVs contain the proteases and substrates necessary to cleave the amyloid precursor protein (APP) to Aβ peptide that forms β-amyloid, a key pathogenic factor in AD. AVs were highly purified using a well-established metrizamide gradient procedure from livers of transgenic YAC mice overexpressing wild-type human APP. By Western blot analysis, AVs contained APP, βCTF - the β-cleaved carboxyl-terminal domain of APP, and BACE, the protease-mediating β-cleavage of APP. β-Secretase activity measured against a fluorogenic peptide was significantly enriched in the AV fraction relative to whole-liver lysate. Compared to other recovered subcellular fractions, AVs exhibited the highest specific activity of γ-secretase based on a fluorogenic assay and inhibition by a specific inhibitor of γ-secretase, DAPT. AVs were also the most enriched subcellular fraction in levels of the γ-secretase components presenilin and nicastrin. Immunoelectron microscopy demonstrated selective immunogold labeling of AVs with antibodies specific for the carboxyl termini of human Aβ40 and Aβ42. These data indicate that AVs are a previously unrecognized and potentially highly active compartment for Aβ generation and suggest that the abnormal accumulation of AVs in affected neurons of the AD brain contributes to β-amyloid deposition.