Transforming growth factor alpha (TGF alpha) and epidermal growth factor (EGF) bind to the same receptor, but have different potencies and actions. A possible mechanism is that differences in processing may be responsible for their divergent properties. We have examined TGF alpha and EGF processing in isolated rat hepatocytes with and without various protease inhibitors and inhibitors of endosomal processing. Our results show that EGF undergoes limited degradation in endosomes and is primarily degraded in lysosomes. In contrast, TGF alpha is rapidly degraded in endosomes by insulin-degrading enzyme (EC 3.4.24.56), possibly allowing rapid return of the receptor to the cell surface. Incubation of isolated endosomes preloaded with labeled TGF alpha reveals that degradation can occur whether the vesicles are acidified or not, as is also the case for insulin. We conclude that TGF alpha is degraded immediately after internalization, at least partly before acidification has occurred, while EGF requires prolonged intracellular residence and lysosomal degradation. The different degradation pathways may play a role in the different activities of the two hormones.