A large number of chemokines, cytokines, and signal peptides share a highly conserved X-Pro motif on the N-terminus. The cleavage of this N-terminal X-Pro dipeptide results in functional alterations of chemokines such as RANTES, stroma-derived factor-1, and macrophage-derived chemokine. Until recently, CD26/DPPIV was the only known protease with the ability to cleave N-terminal X-Pro motifs at neutral pH. We have isolated and cloned a novel serine protease, quiescent cell proline dipeptidase (QPP), with substrate specificity similar to that of CD26/DPPIV. In this paper we show that QPP, like CD26/DPPIV, is synthesized with a propeptide and undergoes N:-glycosylation. Interestingly, this glycosylation is required for QPP enzymatic activity, but not for its localization. Unlike the cell surface molecule, CD26/DPPIV, QPP is targeted to intracellular vesicles that are distinct from lysosomes. Proteinase K treatment of intact vesicles indicates that QPP is located within the vesicles. These vesicles appear to have a secretory component, as QPP is secreted in a functionally active form in response to calcium release. The presence of QPP in the vesicular compartment suggests that molecules bearing the N-terminal X-Pro motif can be cleaved at multiple sites within and outside the cell. These results expand the potential site(s) and scope of a process that appears to be an important mechanism of post-translational regulation.