We have developed a functional assay to identify processed antigen in subcellular fractions from antigen-presenting cells; stimulatory activity in this assay may be caused by either free peptide fragments or by complexes of peptide fragments and class II molecules present on organellar membrane sheets and vesicles. In addition, we have developed a functional assay to identify proteolytic activity in subcellular fractions capable of generating antigenic peptides from intact proteins. These techniques permit the direct identification of intracellular sites of antigen processing and class II association. Using a murine B cell line stably transfected with a phosphorylcholine (PC)-specific membrane-bound immunoglobulin (Ig), we show that PC-conjugated antigens are rapidly internalized and efficiently degraded to generate processed antigen within an early low density compartment. Proteolytic activity capable of generating antigenic peptide fragments from intact proteins is found within low density endosomes and a dense compartment consistent with lysosomes. However, neither processed peptide nor peptide-class II complexes are detected in lysosomes from antigen-pulsed cells. Furthermore, blocking the intracellular transport of internalized antigen from the low density endosome to lysosomes does not inhibit the generation of processed antigen. Therefore, antigens internalized in association with membrane Ig on B cells can be efficiently processed in low density endosomal compartments without the contribution of proteases present within denser organelles.