BACE is an aspartyl protease that cleaves the amyloid precursor protein (APP) at the beta-secretase cleavage site and is involved in Alzheimer's disease. The aim of our study was to determine whether BACE affects the processing of the APP homolog APLP2. To this end, we developed BACE knockout mice with a targeted insertion of the gene for beta-galactosidase. BACE appeared to be exclusively expressed in neurons as determined by differential staining. BACE was expressed in specific areas in the cortex, hippocampus, cerebellum, pons, and spinal cord. APP processing was altered in the BACE knockouts with Abeta levels decreasing. The levels of APLP2 proteolytic products were decreased in BACE KO mice, but increased in BACE transgenic mice. Overexpression of BACE in cultured cells led to increased APLP2 processing. Our results strongly suggest that BACE is a neuronal protein that modulates the processing of both APP and APLP2.