Chromatin undergoes developmentally-regulated structural and chemical changes as cells differentiate, which subsequently lead to differences in cellular function by altering patterns of gene expression. To gain insight into chromatin alterations that occur during mammalian differentiation, we turned to a mouse embryonic stem cell (ESC) model. Here we show that histone H3 is proteolytically cleaved at its N-terminus during ESC differentiation. We map the sites of H3 cleavage and identify Cathepsin L as a protease responsible for proteolytically processing the N-terminal H3 tail. In addition, our data suggest that H3 cleavage may be regulated by covalent modifications present on the histone tail itself. Our studies underscore the intriguing possibility that histone proteolysis, brought about by Cathepsin L and potentially other family members, plays a role in development and differentiation that was not previously recognized.