Destruction of Ii by proteolysis is required for MHC class II molecules to bind antigenic peptides, and for transport of the resulting complexes to the cell surface. The cysteine protease cathepsin S is highly expressed in spleen, lymphocytes, monocytes, and other class II–positive cells, and is inducible with interferon-γ. Specific inhibition of cathepsin S in B lymphoblastoid cells prevented complete proteolysis of Ii, resulting in accumulation of a class II–associated 13 kDa Ii fragment in vivo. Consequently, the formation of SDS-stable complexes was markedly reduced. Purified cathepsin S, but not cathepsin B, H, or D, specifically digested Ii from αβIi trimers, generating αβ–CLIP complexes capable of binding exogenously added peptide in vitro. Thus, cathepsin S is essential in B cells for effective Ii proteolysis necessary to render class II molecules competent for binding peptides.