The transmembrane and multidomain neural adhesion molecule L1 plays important functional roles in the developing and adult nervous system. L1 is proteolytically processed at two distinct sites within the extracellular domain, leading to the generation of different fragments. In this report, we present evidence that the proprotein convertase PC5A is the protease that cleaves L1 in the third fibronectin type III domain, whereas the proprotein convertases furin, PC1, PC2, PACE4, and PC7 are not effective in cleaving L1. Analysis of mutations revealed Arg(845) to be the site of cleavage generating the N-terminal 140-kDa fragment. This fragment was present in the hippocampus, which expresses PC5A, but was not detectable in the cerebellum, which does not express PC5A. The 140-kDa L1 fragment was found to be tightly associated with the full-length 200-kDa L1 molecule. The complex dissociated from the membrane upon cleavage by a protease acting at a more membrane-proximal site of full-length L1. This proteolytic cleavage was inhibited by the metalloprotease inhibitor GM 6001 and enhanced by a calmodulin inhibitor. L1-dependent neurite outgrowth of cerebellar neurons was inhibited by GM 6001, suggesting that proteolytic processing of L1 by a metalloprotease is involved in neurite outgrowth.