The role of cathepsin B, H and L activities in arthritic processes was studied histochemically using specific synthetic substrates in a postcoupling method on unfixed and undecalcified cryostat sections of rat knee joints. Only cathepsin B in synoviocytes, chondrocytes and fibroblasts showed a strong increase in activity due to antigen induced arthritis. The addition of a tissue stabilizer, polyvinyl alcohol, to the incubation medium enabled us to demonstrate extracellular enzymic activity within the articular cartilage matrix of arthritic joints. Both intravenous and oral treatment of the animals with a selective inhibitor of cathepsin B, Z-Phe-Ala fluoromethyl ketone (CH2F), during the development of arthritis suppressed the degree of inflammation and resulted in decreased intracellular and extracellular cathepsin B activity as detected histochemically, and less cartilage damage. Our study indicates that (a) cathepsin B-like activity plays a role in the cascade of proteolytic cartilage destruction, (b) chondrocytes and fibroblasts may well be involved in the breakdown of cartilage and ligaments, and (c) Z-Phe-AlaCH2F could be of therapeutic value.