TGF-alpha and EGF are structurally related factors that bind to and induce tyrosine autophosphorylation of a common receptor. Proteolytic cleavage of the transmembrane TGF-alpha precursor's external domain releases several TGF-alpha species. However, membrane-bound TGF-alpha forms remain on the surface of TGF-alpha-expressing cell lines. To evaluate the biological activity of these forms, we modified two cleavage sites in the TGF-alpha precursor coding sequence, making processing into the 50 amino acid TGF-alpha impossible. Overexpression of this cDNA in a receptor-negative cell line, partial purification, and N-terminal sequence analysis indicate the existence of two transmembrane TGF-alpha forms. These solubilized precursors induce tyrosine autophosphorylation of the EGF/TGF-alpha receptor in intact receptor-overexpressing cells, and anchorage-independent growth of NRK fibroblasts. Cell-cell contact between TGF-alpha precursor-overexpressing cells and cells expressing high numbers of receptors also resulted in receptor activation. These findings suggest a role for transmembrane TGF-alpha forms in intercellular interactions in proliferating tissues.