The protease(s) responsible for removing the amino-terminal extension of nascent presecretory proteins (signal peptidase) has been extracted from rough microsomes of dog pancreas with the detergent sodium deoxycholate. Preprolactin and pre-growth-hormone, prepared by in vitro translation of bovine pituitary RNA in the wheat germ system, were used to assay signal peptidase in the extract. When added to the wheat germ system during translation, the extract reduced the size of preprolactin and pre-growth-hormone to that of prolactin and growth hormone, respectively. Post-translational addition of the extract also reduced the size of preprolactin and pre-growth-hormone to that of the authentic hormones. The prolactin produced by post-translational cleavage of radiolabeled preprolactin has been shown, by partial amino-terminal sequence analysis, to have the correct amino terminus. This post-translational assay has permitted the investigation of the subcellular localization of the enzyme. Sodium deoxycholate extracts of rough microsomes were active, whereas extracts of smooth microsomes were inactive. However, without detergent treatment, neither rough nor smooth microsomes were capable of cleaving preprolactin in the post-translational assay. From this we conclude that the signal peptidase activity is confined to the rough endoplasmic reticulum and is latent. Finally, we have detected two small peptides which we believe could be the signal peptides generated by the endoproteolytic cleavage of preprolactin and pre-growth-hormone by signal peptidase.