Frontotemporal dementia with ubiquitin-positive inclusions (FTLD-U) can be caused by mutations in the progranulin gene (GRN). Progranulin (PGRN) is a cysteine-rich growth factor, which is proteolytically cleaved by elastase to produce several granulins (GRNs). All FTLD-U mutations in GRN characterized to date result in reduced secreted PGRN protein. We recently reported a Spanish family with progressive non-fluent aphasia and dementia in which a novel C521Y mutation segregates with disease. A second cysteine mutation (C139R) has also been reported to be disease specific. Allele-specific mRNA expression assays in brain reveal that the C521Y mutant allele is expressed at similar levels to the wild-type allele. Furthermore, plasma PGRN levels in C521Y carriers are comparable with non-carrier family relatives, suggesting that the mutation does not affect PGRN protein expression and secretion in vivo. Despite normal PGRN levels C521Y and C139R mutant GRNs show reduced neurite growth-stimulating activity in vitro. Further study revealed that these mutations also cause impaired cleavage of PGRN by elastase. Our data suggest that these mutations affect the function of full-length PGRN as well as elastase cleavage of PGRN into GRNs, leading to neurodegeneration.