The peptide DHLSDNYTLDHDRAIH (Link N), cleaved from the N-terminus of the link protein component of cartilage proteoglycan aggregates by the action of stromelysin, can act as a growth factor and stimulate synthesis of proteoglycans and collagen in articular cartilage [McKenna, Liu, Sansom and Dean (1998) Arthritis Rheum. 41, 157-161]. The mechanism by which this biologically active peptide is degraded and inactivated was investigated using U937 monocytes as a model cell. Time-course experiments showed that two major proteases, an initial serine proteinase followed by a metalloproteinase, acted in sequence. Analysis of the resulting fragments showed that the serine endopeptidase cleavage was at the Leu(3)-Ser(4) bond to produce the peptide SDNYTLDHDRAIH. The terminal serine could then be removed from the resulting peptide by an aminopeptidase. A second metallopeptidase liberated the peptides SDNYTL or DNYTL from DHDRAIH by cleavage at the Leu(9)-Asp(10) bond. The DNYTL peptide intermediate was degraded too rapidly to allow sequencing and sequential aminopeptidase cleavages removed further amino acids from the N-terminus of the remaining DHDRAIH peptide. The identical patterns of breakdown that occurred when either whole cells or purified plasma membranes were used indicated that proteolysis and inactivation of Link N was carried out entirely by membrane-associated enzymes.