Phenotypic abnormalities of melanocytes, germ cells, and hematopoietic cells of Steel mice demonstrate the critical role of stem cell factor (SCF) in development. Production of SCF in the hematopoietic microenvironment as either a membrane-associated or soluble factor leads to pleiotropic effects on hematopoietic stem and progenitor cells and significant effects on the production of erythroid cells. Although the production of these two forms of SCF is highly regulated, the physiologic role(s) of membrane-associated and soluble SCF remain unclear. We have demonstrated that the generation of soluble murine SCF by murine stromal cells derived from the fetal hematopoietic microenvironment is dependent on two distinct proteolytic cleavage sites. The primary site in exon 6 is preferentially utilized in these cells. The secondary site located in exon 7 is utilized only in the absence of the primary site. Proteolytic processing at this secondary site appears to be species-specific, since the human protein sequence diverges at this site, and protein expressed from the human cDNA encoding this site in murine stromal cells remains largely membrane-associated. Site-directed mutagenesis of the murine SCF cDNA encoding both proteolytic cleavage sites leads to the generation of membrane-associated and biologically active SCF on murine stromal cells. These results suggest that the regulation of processing of the secondary proteolytic cleavage site could play a critical role in the function of membrane-associated SCF protein.