Secretory proteins are synthesized with a signal sequence that is usually cleaved from the nascent protein during the translocation of the polypeptide chain into the lumen of the endoplasmic reticulum. To determine the fate of a cleaved signal sequence, we used a synchronized in vitro translocation system. We found that the cleaved signal peptide of preprolactin is further processed close to its COOH terminus. The resulting fragment accumulated in the microsomal fraction and with time was released into the cytosol. Signal sequence cleavage and processing could be reproduced with reconstituted vesicles containing Sec61, signal recognition particle receptor, and signal peptidase complex.