HIV-Encephalopathy (HIVE) is a common neurological disorder associated with HIV-1 infection and AIDS. The activity of the HIV trans-activating protein Tat is thought to contribute to neuronal pathogenesis. While Tat proteins from primary virus isolates consist of 101 or more amino acids, 72 and 86 amino acids forms of Tat are commonly used for in vitro studies. Although Tat72 contains the minimal domain required for viral replication, other activities of Tat appear to vary according to its length, sub-cellular localization, cell type and the stage of cellular differentiation. In this study, we investigated the stability of intracellular Tat101 during proliferation and differentiation of neuronal cells in culture. We have utilized rat neuronal progenitors as a model of neuronal cell proliferation and differentiation, as well as rat primary cortical neurons as a model of fully differentiated cells. Our results indicate that, upon internalization, Tat101 was degraded more rapidly in proliferating cells than in cells which either underwent neuronal differentiation or were fully differentiated. Intracellular degradation of Tat was prevented by the calpain 1 inhibitor, ALLN, in both proliferating and differentiated cells. Inhibition of calpain 1 by calpastatin peptide also prevented Tat cleavage. In vitro calpain digestion and mass spectrometry analysis further demonstrated that the sequence of Tat sensitive to calpain cleavage was located in the C-terminus of this viral protein, between amino acids 68 and 69. Moreover, cleavage of Tat101 by calpain 1 increased neurotoxic effect of this viral protein and presence of the calpain inhibitor protected neuronal cells from Tat-mediated toxicity.