Insulin-like growth factors (IGF-I and IGF-II) in biological fluids bind to high-affinity binding proteins (IGFBP-1 to -6), which transport them and regulate their activities. Limited proteolysis of certain IGFBPs plays a major role in this regulation. IGFBP-3 is proteolysed in vivo and in several cell lines by serine proteases, including plasmin. In earlier studies we reproduced this proteolysis in vitro using recombinant human non-glycosylated IGFBP-3. Two major fragments were obtained, the larger retaining weak affinity for IGF-I and weakly inhibiting IGF I mitogenic effects. The smaller fragment, though lacking affinity for IGFs, is a potent growth inhibitor. These proteolytic fragments were isolated by HPLC and their N-terminal amino acids sequenced. Both major fragments contain the N-terminal region of the intact protein, the larger form corresponding to residues 1-160, and the smaller form, to residues 1-95. Kinetics experiments using the MG-63 osteoblast-like cell line showed that the larger peptide is generated before the smaller peptide, the latter probably being a product of secondary proteolysis of the former. Our data suggest that proteolysis of IGFBP-3 is intimately linked to its biological function. We propose a model for its action at cellular level.