The mammalian SHC gene encodes three overlapping proteins which all contain a carboxy-terminal SH2 domain. Shc proteins are phosphorylated on tyrosine by a variety of receptor and cytoplasmic tyrosine kinases. Phosphorylated Shc proteins form a complex with the SH2-SH3 containing Grb2 protein which is implicated in the regulation of Ras, suggesting that Shc is involved in the intracellular transmission of growth signals from activated tyrosine kinases to Ras. Overexpression of Shc proteins in cultured fibroblasts induces a transformed phenotype. We now report that, in vitro, the high affinity binding of Grb2 to Shc proteins requires phosphorylation of Shc at Tyr317, which lies within the high affinity binding motif for the Grb2 SH2 domain, pYVNV, where Asn at the +2 position is crucial for complex formation. In vivo, Tyr317 is the major, but not the only, site for Shc phosphorylation, and is the sole Shc high affinity binding site for Grb2. Mutant Shc proteins with substitution of the Tyr317 by Phe lose the capacity to be highly phosphorylated on tyrosine upon growth factor receptor activation, to bind Grb2 and to induce neoplastic transformation. In contrast, Shc proteins that have an extensive aminoterminal deletion, but retain the Tyr317 site and the SH2 domain conserve the capacity to be phosphorylated, to bind to Grb2 and to induce cell transformation. These data indicate that the formation of the Shc-Grb2 complex is a crucial event in the transformation induced by overexpression of Shc and support the notion that Shc proteins can deliver activation signals to RAS.