Proteins internalized into the endocytic pathway are usually degraded. Efficient proteolysis requires denaturation, induced by acidic conditions within lysosomes, and reduction of inter- and intrachain disulfide bonds. Cytosolic reduction is mediated enzymatically by thioredoxin, but the mechanism of lysosomal reduction is unknown. We describe here a lysosomal thiol reductase optimally active at low pH and capable of catalyzing disulfide bond reduction both in vivo and in vitro. The active site, determined by mutagenesis, consists of a pair of cysteine residues separated by two amino acids, similar to other enzymes of the thioredoxin family. The enzyme is a soluble glycoprotein that is synthesized as a precursor. After delivery into the endosomal/lysosomal system by the mannose 6-phosphate receptor, N- and C-terminal prosequences are removed. The enzyme is expressed constitutively in antigen-presenting cells and induced by IFN-γ in other cell types, suggesting a potentially important role in antigen processing.