Mucolipidosis II is a severe lysosomal storage disorder caused by defects in the alpha and beta subunits of the hexameric N-acetylglucosamine-1-phosphotransferase complex essential for the formation of the mannose 6-phosphate targeting signal on lysosomal enzymes. Cleavage of the membrane-bound alpha/beta-subunit precursor by an unknown protease is required for catalytic activity. Here we found that the alpha/beta-subunit precursor is cleaved by the site-1 protease (S1P) that activates sterol regulatory element-binding proteins in response to cholesterol deprivation. S1P-deficient cells failed to activate the alpha/beta-subunit precursor and exhibited a mucolipidosis II-like phenotype. Thus, S1P functions in the biogenesis of lysosomes, and lipid-independent phenotypes of S1P deficiency may be caused by lysosomal dysfunction.