Previous work (Yanagishita, M., and Hascall, V. C. (1984) J. Biol. Chem. 259, 10270-10283) has indicated that heparan sulfate (HS) proteoglycans in rat ovarian granulosa cells are degraded by two kinetically distinct pathways. Pathway 1 degrades proteoglycans rapidly with a t 1/2 approximately 25 min without generating appreciable degradative intermediates. Pathway 2 degrades proteoglycans more slowly with a t 1/2 approximately 4 h, generating distinct degradative intermediates: single HS chains of Mr = approximately 10,000 and approximately 5,000. Effects of leupeptin, an inhibitor of thiol proteases, on the intracellular degradation of proteoglycans in the rat ovarian granulosa cell culture were examined using various chase protocols after labeling cells with [35S]sulfate. The presence of leupeptin at 100 micrograms/ml in the culture medium inhibited the intracellular degradation of proteoglycans by approximately 80% during a 7-h chase period after a 20-h labeling. Leupeptin affected neither the cellular content nor the in vitro activities of beta-hexosaminidase and arylsulfatase. Structural analyses of heparan sulfate species in leupeptin-treated cells demonstrated that the drug inhibited the degradation of HS proteoglycans at two distinct points. First, degradation of the core protein was partially inhibited and delayed before the start of glycosaminoglycan degradation. This resulted in the accumulation of degradative intermediates with partially degraded core proteins bearing intact glycosaminoglycan chains. This establishes the initial sequence for HS proteoglycan degradation, with proteolysis preceding endoglycosidase digestion, and suggests that these two degradation steps may occur in physically separate compartments. Second, the final depolymerization of HS fragments through pathway 2 was totally inhibited, resulting in the continuous accumulation of Mr = 5,000 HS chains. This is not due to the direct inhibition of the lysosomal exoglycosidase and sulfatase enzymes responsible for the complete depolymerization of HS chains, since pathway 1, while slowed, continued to completely depolymerize the HS chains in the presence of leupeptin. The results suggest that the intracellular compartment which completely degrades heparan sulfate chains is separate from those containing partially, endoglycosidically processed heparan sulfate chains and that leupeptin interfered with the translocation of glycosaminoglycans to the final degradation site.