Proteolytic systems are involved via multiple mechanisms in the regulation of gene expression, including tightly controlled metabolism of transcription factors. In this study, we demonstrate that differentiation of mouse embryonal carcinoma cells to parietal endoderm-like cells is accompanied by the appearance of nuclear protease activity. Interestingly, this nuclear-associated protease activity is not observed in the visceral endoderm-like cell line, PSA-5E, or in the differentiated cells derived from both mouse embryonic stem cells and the human embryonal carcinoma cell line NT2/D1. We also determined that this differentiation-associated nuclear protease activity causes proteolysis of a wide range of different transcription factors, including ATF-1, Sp1, NF-YA and B, and octamer-binding proteins Oct-1 and Oct-3. Based on the effects of specific inhibitors, the nuclear protease(s) can be classified as a cysteine protease; however, lack of inhibition by calpastatin and EGTA distinguishes this protease activity from the calpain family of proteases. Given the properties of the differentiation-associated nuclear protease(s), we discuss the possibility that this protease(s) plays a role in the metabolism of transcription factors during the differentiation of specific embryonic cells.