Toll-like receptor (TLR) 3 is an endosomal TLR that mediates immune responses against viral infections upon activation by its ligand double-stranded RNA, a replication intermediate of most viruses. TLR3 is expressed widely in the body and activates both the innate and adaptive immune systems. However, little is known about how TLR3 intracellular trafficking and maturation are regulated. Here we show that newly synthesized endogenous TLR3 is transported through the ER and Golgi apparatus to endosomes, where it is rapidly cleaved. TLR3 protein expression is up-regulated by its own ligand, leading to the accumulation of its cleaved form. In agreement with its proposed role as a transporter, UNC93B1 expression is required for TLR3 cleavage and signaling. Furthermore, TLR3 signaling and cleavage are sensitive to cathepsin inhibition. Cleavage occurs between aa 252 and 346, and results in a functional receptor that signals upon activation. A truncated form of TLR3 lacking the N-terminal 345 aa also signals from acidic compartments in response to ligand activation. Screening of the human cathepsin family by RNA interference identified cathepsins B and H as key mediators of TLR3 processing. Taken together, our data indicate that TLR3 proteolytic processing is essential for its function, and suggest a mechanism of tight control of TLR3 signaling and thus immunity.