An important function of membrane immunoglobulin (mIg), the B cell antigen receptor, is to endocytose limiting quantities of antigen for efficient presentation to class II-restricted T cells. We have used a panel of mIg mutants to analyze the mechanism of mIg-mediated antigen presentation, and specifically to explore the ability of mIg to target internalized antigen to intracellular processing compartments. Transfected mIgs carrying substitutions for the transmembrane Tyr587 residue fail to efficiently present specifically bound antigen. However, these mutants internalize antigen normally, and their defect cannot be attributed to a lack of mIg-associated Ig alpha/Ig beta molecules. A novel functional assay for detecting antigenic peptides in subcellular fractions shows that wild-type mIg transfectants generate class II-peptide complexes intracellularly, whereas only free antigenic peptides are detectable in the mutant mIg transfectants. Furthermore, an antigen competition assay reveals that antigen internalized by the mutant mIgs fails to enter the intracellular processing compartment accessed by wild-type mIg. Therefore, mIg specifically targets bound and endocytosed antigen to the intracellular compartment where processed peptides associate with class II molecules, and the transmembrane Tyr587 residue plays an obligatory role in this process. Targeting of internalized antigen may be mediated by receptor-associated chaperones, and may be a general mechanism for optimizing the presentation of specifically bound and endocytosed antigens in b lymphocytes and other antigen-presenting cells.