Fatty acylation of proteins on cysteine residues is a common post-translational modification that plays roles in protein-membrane and protein-protein interactions. Recently, we described a lysosomal palmitoyl-protein thioesterase that removes long-chain fatty acids from lipid-modified cysteine residues in proteins. Deficiency in palmitoyl-protein thioesterase results in a human lysosomal storage disorder, infantile neuronal ceroid lipofuscinosis (INCL), which primarily affects the central nervous system. The pathological hallmark of the disorder is the accumulation of granular osmiophilic deposits (GROD) that resemble lipofuscin, or aging pigment. In previous work, we have shown that [35S]cysteine-labeled lipid thioesters derived from fatty acylated proteins accumulate in cultured cells derived from palmitoyl-protein thioesterase-deficient patients. In the present work, we show that the lipid cysteine thioesters accumulate in the lysosomal fraction, and we further show that the appearance of these compounds in the organic phase is blocked by inhibitors of lysosomal proteolysis, demonstrating through biochemical means the lysosomal nature of the site of palmitoyl-protein thioesterase action. Furthermore, substrates for palmitoyl-protein thioesterase accumulate even in normal cells after leupeptin or chloroquine treatment. This was demonstrated by subjecting extracts of treated cells to exhaustive proteolysis to release protein-bound cysteine lipid for analysis. Cysteamine, a lysosomotropic drug recently proposed for the treatment of INCL, was found to have effects similar to leupeptin and chloroquine, suggesting that its mechanism of action may be more complex than previously understood.