Transforming growth factor-alpha (TGF-alpha) is synthesized as a transmembrane protein with a highly conserved, short cytoplasmic domain that is rich in cysteines. TGF-alpha is a prototype of a large family of growth factors involved in cell-cell communication. We have shown previously that transmembrane TGF-alpha associates with a kinase activity and two proteins of 106 and 86 kDa. In this study, we have used site-directed mutagenesis of the cytoplasmic domain of TGF-alpha to define the structural requirements for these protein interactions. Whereas the cytoplasmic domain of TGF-alpha was not essential for association with transmembrane p106, deletion of the C-terminal 8 amino acids, including a cysteine pair, abolished the interaction with p86 and greatly reduced the kinase activity associated with transmembrane TGF-alpha. Replacement of these 2 cysteines by serines similarly reduced the association of p86 with transmembrane TGF-alpha. Using a combination of mutational analysis and direct microsequencing, we have determined that this cysteine pair was palmitoylated. We therefore conclude that these cysteines play a critical role in the interaction of TGF-alpha with associated proteins and in the function of this protein complex. The palmitoylation of these cysteines suggests a possibly dynamic role of fatty acid modification in the integrity and function of the transmembrane TGF-alpha complex.