Persistent reovirus infections of murine L929 (L) fibroblast cells select mutant (LX) cells that do not support proteolytic disassembly of reovirus virions within the endocytic pathway. To better understand the function and regulation of endocytic proteases, we conducted experiments to define the block to reovirus disassembly displayed by LX cells. In contrast to parental L cells, mutant LX cells harbor defects that interfere with the maturation and activity of cathepsin B and cathepsin L but not cathepsin H. The cDNAs encoding cathepsin B and cathepsin L in L cells are identical to those in LX cells, indicating that LX cells manifest an extrinsic block to the function of these enzymes. Mixed lysates of L cells and LX cells lack activity of both cathepsin B and cathepsin L, suggesting the presence of an inhibitor of cathepsin function in LX cells. A cathepsin B-green fluorescent protein (GFP) fusion protein expressed in L cells and purified by immunoprecipitation retains cathepsin B activity, whereas cathepsin B-GFP expressed in LX cells does not. However, activity of cathepsin B-GFP expressed in LX cells can be recovered by incubating the immunoprecipitate with L cell lysate followed by immunoprecipitation, providing further evidence that LX cells express a cathepsin inhibitor. Native-gel electrophoresis and gel filtration chromatography demonstrate that, in both cell lines, the double-chain form of cathepsin B is sequestered in a large molecular weight complex that renders this form of the enzyme inactive. Alteration of this sequestration complex appears to be responsible for inhibition of cathepsin B in LX cells. These findings suggest that cathepsins can be regulated within the endocytic pathway. Moreover, this regulation influences host cell susceptibility to intracellular pathogens.