Intracellular transport and degradation of membrane anchored heparan sulfate proteoglycans (HSPGs) were studied in cultured rat hepatocytes labeled with [35S]sulfate and [3H]glucosamine. Pulse chase experiments showed that membrane anchored HSPGs were constitutively transported to the cell surface after completion of polymerization and modification of the glycosaminoglycan chains in the Golgi apparatus. The intact HSPGs had a relatively short residence time at the cell surface and in non-degrading compartments (T(1/2) approximately 2-3 h), while [35S]sulfate labeled degradation products were found in lysosomes, and to a lesser extent in late endosomes. These degradation products which were free heparan sulfate chains with little or no protein covalently attached, were approximately half the size of the original glycosaminoglycan chains and were the only degradation intermediate found in the course of HSPG catabolism in these cells. In cells incubated in the presence of the microtubule perturbant vinblastine, or in the presence of the vacuolar ATPase inhibitor bafilomycin A1, and in cells incubated at 19 degrees C, the endocytosed HSPGs were retained in endosomes and no degradation products were detected. Disruption of lysosomes with glycyl-phenylalanine 2-naphthylamide (GPN) revealed a GPN resistant degradative compartment with both intact and partially degraded HSPGs. This compartment probably corresponds to late endosomes. Treatment of hepatocytes with the thiol protease inhibitor leupeptin inhibited the final degradation of the protein moiety of the HSPGs. The protein portion seems to be degraded completely before the glycosaminoglycan chains are cleaved. The degradation of the glycosaminoglycan chains is rapid and complete with one observable intermediate.