Antigen processing requires intracellular antigen catabolism to generate immunogenic peptides that bind to class II MHC molecules (MHC-II) for presentation to T-cells. We now provide direct evidence that these peptides are produced within dense lysosomes, as opposed to earlier endocytic compartments. The protein antigen hen egg lysozyme was targeted to endosomes or lysosomes by encapsulating it in liposomes of different membrane composition. Acid-sensitive liposomes released their contents in early endosomes, whereas acid-resistant liposomes sequestered their contents from potential endosomal processing events and released their contents only after delivery to lysosomes. Antigen encapsulated in acid-resistant liposomes was processed in a chloroquine-sensitive manner and presented more efficiently than soluble antigen or antigen encapsulated in acid-sensitive liposomes. Thus, peptides may be recycled from lysosomes, transported to endosomes to bind MHC-II, and then expressed at the cell surface.