The release of T4 and T3 from the prohormone thyroglobulin (Tg) occurs in thyroid lysosomes. To examine the role of cathepsin-B, -D, and -L, the three major endopeptidases in this process, we incubated rabbit [I-125]Tg, labeled in vivo, with lysosomal extracts from human thyroids. Iodopeptide formation was evaluated by polyacrylamide gel electrophoresis in sodium dodecyl sulfate after short term incubations (20-45 min), while iodoamino acid release was assessed by paper chromatography after long term incubations (8 and 24 h). Using pepstatin to inhibit cathepsin D, z-Phe-Ala-CHN2 to inhibit both cathepsin B and L, and z-Phe-Phe-CHN2 to selectively inhibit cathepsin L, we obtained the following results: 1) blocking of all three endopeptidases reduced both iodopeptide formation in short term experiments and iodoamino acid release in long term experiments by 80-90%; 2) iodopeptide formation was reduced by 85% with z-Phe-Ala-CHN2, by 56% with z-Phe-Phe-CHN2, and by 26% with pepstatin; 3) iodoamino acid release was reduced by 60-80% with z-Phe-Ala-CHN2 and by 40-50% with either z-Phe-Phe-CHN2 or pepstatin at 8 h, but by less than 20% at 24 h; pepstatin and z-Phe-Phe-CHN2 together reduced iodoamino acid release by 80% and 60% at 8 and 24 h, respectively. Limited hydrolysis of Tg by lysosomal enzymes produced at least eight peptide fragments of less than 100,000 mol wt. Three of these, together representing 32% of the I-125 released, resulted from cleavages in the C-terminal region of Tg corresponding to residues 2487, 2393, and 2390 of cDNA-derived human Tg. Several other peptides, together containing 38% of the I-125 released, included the N-terminus of Tg. These C-terminal and N-terminal fragments contained three of Tg's four major hormonogenic sites, but none of the cleavage sites fell close to the hormone sites themselves. We conclude that 1) the formation of discrete iodopeptides precedes the release of iodothyronines and iodotyrosines from Tg; 2) the cysteine proteinases are more important than cathepsin D in this process; and 3) these endopeptidases selectively cleave Tg to favor the production of hormone-containing intermediates for subsequent processing by exopeptidases.