Rat liver secretory component is synthesized as an integral membrane protein (mSC) and cleaved to an 80-kD soluble form (fSC) sometime during transcellular transport from the sinusoidal to the bile canalicular plasma membrane domain of hepatocytes. We have used 24-h monolayer cultures of the rat hepatocytes to characterize the conversion of mSC to fSC. Cleavage of mSC in cultured hepatocytes is inhibited by the thiol protease inhibitors leupeptin, antipain, and E-64, but not by other inhibitors, including diisopropylfluorophosphate, pepstatin, N-ethylmalemide, p-chloromercuribenzoic acid, and chlorquine. Leupeptin-mediated inhibition of cleavage is concentration dependent and reversible. In the presence or absence of leupeptin, only 10-20% of mSC is accessible at the cell surface. To characterize the behavior of surface as opposed to intracellular mSC, cell surface mSC was labeled with 125I by lactoperoxidase-catalyzed iodination at 4° C. Cell surface 125I-mSC was converted to extracellular fSC at 4° C in the absence of detectable internalization. Cleavage was inhibited by leupeptin and by anti-secretory component antiserum. Cleavage also occurred at 4° C after cell disruption. In contrast, 12a5I-mSC that had been internalized from the cell surface was not converted to fSC at 4° C in either intact or disrupted cells. Hepatocytes metabolically labeled with [35S]cys also released small quantities of fSC into the medium at 4° C. The properties of fSC production indicate that cleavage occurs on the surface of cultured rat hepatocytes and not intracellularly. Other features of the cleavage reaction suggest that the mSC-cleaving protease is segregated from the majority of cell surface mSC, possibly within a specialized plasma membrane domain.