The cleavage of a high-mannose form of Ii to p25 was demonstrated in an intracellular compartment of B cells. Subcellular fractions of 72 hr-activated B cells, separated by Percoll density gradient centrifugation, were immunoprecipitated with anti-class II or anti-Ii serum and characterized for 5'-nucleotidase, acid phosphatase, and radiolabeled transferrin. The cleavage of p25 from Ii as a C-terminal fragment occurred from 20 to 60 min after synthesis in an intracellular compartment which was intermediate in density between lysosomal and plasma membrane fractions and coincided with the lighter to two internalized transferrin compartments. Chloroquine or monensin treatments, at maximal nontoxic doses, which block Golgi and lysosomal functions, did not seem to alter the cleavage of Ii to p25. p25 molecules were reduced to about 10,500 daltons by treatment with endoglycosidases F or H. We conclude that p25 was generated from a high mannose form of Ii in the endoplasmic reticulum or cis-Golgi. This finding could either implicate that site for class II MHC desetope charging with foreign peptides or reflect a mechanism for degradation of "excess" Ii molecules.