Immature B cells differentiate in the spleen into mature B cells, a process that is essential for their participation in the immune response. Previously, we showed that the MHC class II chaperone, invariant chain (Ii), controls this differentiation to the mature stage. Ii cytosolic domain-induced B cell maturation involves activation of transcription mediated by the NF-kappaB p65/RelA homodimer and requires the B cell enriched coactivator, TAF(II)105. In this study we show that the cytosolic region of Ii is cleaved within the plane of the membrane to generate a cytosolic fragment, which is essential for NF-kappaB activation and B cell differentiation. Our results suggest that Ii functions as a membrane-bound inactive inducer of NF-kappaB transcription that is activated by intramembrane proteolytic cleavage.