Activated microglia release inflammatory mediators that display either beneficial or harmful effects on neuronal survival and signaling. In the present study we demonstrate that exposure to lipopolysaccharide leads to an increase in the lysosomal cysteine proteases, cathepsin B, K, S, and X, in culture supernatants of the microglia cell line BV-2. In addition, we observed an up-regulation of cathepsins in the cytoplasmic fraction in response to stimulation with lipopolysaccharide. Conditioned medium from these cells was toxic to the neuroblastoma cell line Neuro2a. Experiments with membrane-permeable and membrane-impermeable cysteine protease inhibitors suggested that blocking extracellular cathepsins had no effect on microglia-mediated neuron death in this medium transfer model. However, intracellular cathepsins seem to trigger the release of neurotoxic factors. In lipopolysaccharide-stimulated BV-2 cells, inhibition of intracellular cathepsins significantly diminished microglial activation characterized by reduced expression of different proinflammatory cytokines, thereby reducing the neurotoxic effects of the medium. This hitherto unknown intracellular effect of cysteine proteases in activated microglia might connect chronic neuroinflammation with neurodegeneration.