Altered lysosomal function in the visceral yolk sac can result in abnormal development. As proteolysis is an important function of the rodent visceral yolk sac during early and mid-gestation, we characterized the lysosomal proteolytic enzyme activity of this extraembryonic membrane and determined the effects of inhibitors of protein degradation on embryonic development. Constituent activities of cysteine and aspartic acid proteinases were measured in rat visceral yolk sac on gestation day 12, and the effects of the cysteine proteinase inhibitors leupeptin, E-64 [trans-epoxysuccinyl-l-leucylamido(4-guanido)butane] and N-ethylmaleimide and the aspartic acid proteinase inhibitor pepstatin were determined in Sprague-Dawley rat embryos cultured in vitro from gestation days 10-12. It was determined that only cysteine proteinases, primarily cathepsins B and L, are active in the mid-gestation visceral yolk sac. The cysteine proteinase inhibitors leupeptin and E-64 both produced a concentration-related decrease in embryonic growth, as measured by crown-rump length, somite number, and embryonic protein content, and a concentration-related increase in incidence of abnormalities. A characteristic pattern of abnormalities was produced which involved a decrease in neural tube volume and the formation of a subectodermal blister opposite the point of attachment of the vitelline vessels. At high concentrations, anophthalmia was also observed. The decreased neural tube volume was associated with increased osmolality of the exocoelomic fluid, the major extraembryonic fluid compartment. It is possible that the osmotic change decreased neural tube volume by causing water to move to the compartment with a higher solute concentration, out of the embryo. Leupeptin and E-64 treatment increased yolk sac protein content, and produced histologically observable protein droplets (probably secondary lysosomes), indicating that lysosomal protein degration was inhibited. N-Ethylamaleimide was a potent embryotoxin, but had none of the effects of the other cysteine proteinase inhibitors at concentrations which were not embryolethal. However, it should be noted that N-ethylamaleimide was embryolethal at a concentration which is 1,000-fold lower than that which inhibits cysteine proteinase activity in a lysosomal lysate. Pepstatin, an aspartic acid proteinase inhibitor, was without effect at any concentration tested (up to 300-mu-g/ml). These results indicate that inhibition of lysosomal proteolysis in the visceral yolk sac, specifically by cysteine proteinase inhibitors, is developmentally toxic to rats. The effects produced may be attributable both to lack of substrates (amino acids) for growth, and altered osmolality in the extraembryonic fluid compartment.