We investigated endoproteolytic processing of the human immunodeficiency virus (HIV) envelope glycoprotein precursor, gpl60, as well as envelopemediated membrane fusion in the presence of CD4 molecules that were either partially or fully retained in the endoplasmic reticulum (ER). Pulse-chase analyses revealed that gpl60 formed complexes with CD4 molecules, and gpl60 in the complex was endoproteolyticaUy cleaved to gpl20 and gp41 in the secretory pathway. The gpl20/gp41 complex thus generated was properly targeted to the plasma membrane in cells expressing gpl60 and wild-type CD4 or mutant CD4 molecules that were partially retained in the ER. Additionally, membrane fusion (syncytium) assays were performed to monitor the presence or absence of gpl20/gp41 complexes at the cell surface of cotransfected cells and demonstrated that the HIV-1 envelope glycoprotein-mediated membrane fusion was appreciably reduced in the presence of wild-type CD4 or either one of the mutant CD4 molecules. Reduction in the formation of syncytia appears to be due predominantly to saturation of the CD4 binding site on the gpl20/gp41 complex at the cell surface of cotransfected cells, but partial retention of the complex in the ER could also partly account for the reduction. However, the intracellular gpl20/gp41 complex generated in cells expressing gpl60 and CD4 mutant having the transmembrane ER retention signal (KKTC) was completely retained in the ER and hence could not participate in membrane fusion events at the plasma membrane. Taken together, these data suggest that the endoproteolytic cleavage ofgp 160 occurs in the ER or cis-Golgi network, and ER retention strategies can potentially be used in preventing the spread of HIV-1 infection in permissive cells.