The E3 transcription unit of human species C adenoviruses (Ads) encodes immunomodulatory proteins that mediate direct protection of infected cells. Recently, we described a novel immunomodulatory function for E3/49K, an E3 protein uniquely expressed by species D Ads. E3/49K of Ad19a/Ad64, a serotype that causes epidemic keratokonjunctivitis, is synthesized as a highly glycosylated type I transmembrane protein that is subsequently cleaved, resulting in secretion of its large ectodomain (sec49K). sec49K binds to CD45 on leukocytes, impairing activation and functions of natural killer cells and T cells. E3/49K is localized in the Golgi/trans-Golgi network (TGN), in the early endosomes, and on the plasma membrane, yet the cellular compartment where E3/49K is cleaved and the protease involved remained elusive. Here we show that TGN-localized E3/49K comprises both newly synthesized and recycled molecules. Full-length E3/49K was not detected in late endosomes/ lysosomes, but the C-terminal fragment accumulated in this compartment at late times of infection. Inhibitor studies showed that cleavage occurs in a post-TGN compartment and that lysosomotropic agents enhance secretion. Interestingly, the cytoplasmic tail of E3/49K contains two potential sorting motifs, YXX⌽ (where ⌽ represents a bulky hydrophobic amino acid) and LL, that are important for binding the clathrin adaptor proteins AP-1 and AP-2 in vitro. Surprisingly, mutating the LL motif, either alone or together with YXX⌽, did not prevent proteolytic processing but increased cell surface expression and secretion. Upon brefeldin A treatment, cell surface expression was rapidly lost, even for mutants lacking all known endocytosis motifs. Together with immunofluorescence data, we propose a model for intracellular E3/49K transport whereby cleavage takes place on the cell surface by matrix metalloproteases.