The cerebral deposition of amyloid beta-peptide (Abeta) is a major factor in the etiology of Alzheimer's disease. beta-Secretase (BACE) initiates the generation of Abeta by cleaving the amyloid precursor protein at the beta-site and is therefore a prime target for therapeutic intervention. Here we report a cell-based method suitable for monitoring BACE activity and the efficacy of protease inhibitors. A fusion protein containing the amino-terminal transmembrane domain of Golgi alpha-mannosidase II, a Drosophila Golgi integral membrane protein, linked to human alkaline phosphatase (AP) by a short beta-site sequence, was expressed in Drosophila S2 cells. While the uncleaved fusion protein was retained in the Golgi apparatus, cleavage of the beta-site by BACE resulted in the release of AP to the culture medium, where it was easily detected and quantified. Three peptidomimetic inhibitors (LB83190, LB83192, LB83202) were tested for their efficacy with this cell-based assay. While LB83190 and LB83192 effectively blocked BACE activity, LB83202, a carboxylated derivative of LB83192, did not. This is consistent with the inability of LB83202 to permeate the cell membrane. The present cell-based assay could provide a convenient tool for high-throughput screening of substances that can interfere with BACE in living cells.