The CCAAT displacement protein (CDP), the homologue of the Drosophila melanogaster Cut protein, contains four DNA binding domains that function in pairs. Cooperation between Cut repeat 3 and the Cut homeodomain allows stable DNA binding to the ATCGAT motif, an activity previously shown to be upregulated in S phase. Here we showed that the full-length CDP/Cut protein is incapable of stable DNA binding and that the ATCGAT binding activity present in cells involves a 110-kDa carboxy-terminal peptide of CDP/Cut. A vector expressing CDP/Cut with Myc and hemagglutinin epitope tags at either end generated N- and C-terminal products of 90 and 110 kDa, suggesting that proteolytic cleavage was involved. In vivo pulse/chase labeling experiments confirmed that the 110-kDa protein was derived from the full-length CDP/Cut protein. Proteolytic processing was weak or not detectable in G₀ and G₁ but increased in populations of cells enriched in S phase, and the appearance of the 110-kDa protein coincided with the increase in ATCGAT DNA binding. Interestingly, the amino-truncated and the full-length CDP/Cut isoforms exhibited different transcriptional properties in a reporter assay. We conclude that proteolytic processing of CDP/Cut at the G₁/S transition generates a CDP/Cut isoform with distinct DNA binding and transcriptional activities. These findings, together with the cleavage of the Scc1 protein at mitosis, suggest that site-specific proteolysis may play an important role in the regulation of cell cycle progression.