We examined the role of proteolytic ligand modification in endosomal targeting using vitellogenin (VTG) uptake by Xenopus oocytes as a model system. Non-cleavable VTG is internalized, but does not appear in yolk platelets. We identified two inhibitors of VTG processing into the yolk proteins: the ionophore monensin and pepstatin A, a specific inhibitor of cathepsin D. Pepstatin neither affected ligand binding and internalization, nor inhibited the degradation of nonspecifically incorporated proteins, whereas monensin inhibited all of these processes. Inhibiting VTG processing prevented its deposition into yolk platelets by strongly interfering with endosome-yolk platelet fusion. Monensin treatment resulted in morphologically abnormal endosomes, while pepstatin only inhibited VTG cleavage and the subsequent fusion of endosomes with yolk platelets. Since VTG cleavage is initiated prior to its deposition in platelets, we postulate that ligand proteolysis could be necessary for normal endosomal targeting.