The human lbc oncogene product is a guanine nucleotide exchange factor that specifically activates the Rho small GTP binding protein, thus resulting in biologically active, GTP-bound Rho, which in turn mediates actin cytoskeletal reorganization, gene transcription, and entry into the mitotic S phase. In order to elucidate the mechanism of onco-Lbc transformation, here we report that while proto- and onco-lbc cDNAs encode identical N-terminal dbl oncogene homology (DH) and pleckstrin homology (PH) domains, proto-Lbc encodes a novel C terminus absent in the oncoprotein that includes a predicted alpha-helical region homologous to cyto-matrix proteins, followed by a proline-rich region. The lbc proto-oncogene maps to chromosome 15, and onco-lbc represents a fusion of the lbc proto-oncogene N terminus with a short, unrelated C-terminal sequence from chromosome 7. Both onco- and proto-Lbc can promote formation of GTP-bound Rho in vivo. Proto-Lbc transforming activity is much reduced compared to that of onco-Lbc, and a significant increase in transforming activity requires truncation of both the alpha-helical and proline-rich regions in the proto-Lbc C terminus. Deletion of the chromosome 7-derived C terminus of onco-Lbc does not destroy transforming activity, demonstrating that it is loss of the proto-Lbc C terminus, rather than gain of an unrelated C-terminus by onco-Lbc, that confers transforming activity. Mutations of onco-Lbc DH and PH domains demonstrate that both domains are necessary for full transforming activity. The proto-Lbc product localizes to the particulate (membrane) fraction, while the majority of the onco-Lbc product is cytosolic, and mutations of the PH domain do not affect this localization. The proto-Lbc C-terminus alone localizes predominantly to the particulate fraction, indicating that the C terminus may play a major role in the correct subcellular localization of proto-Lbc, thus providing a mechanism for regulating Lbc oncogenic potential.