The neu/HER2 proto-oncogene encodes a transmembrane tyrosine kinase homologous to receptors for polypeptide growth factors. The oncogenic potential for the presumed receptor is released through multiple genetic mechanisms including a specific point mutation, truncation at the extracellular domain and overexpression of the protooncogene. Here we show that all these modes of oncogenic activation result in a constitutively phosphorylated neu protein and an increase in tyrosine phosphorylation of a phosphatidylinositol-specific phospholipase (PLC gamma). The examined transforming neu/HER2 proteins, unlike the normal gene product, also co-immunoprecipitated with PLC gamma molecules. A kinase-defective mutant of a transforming neu failed to mediate both tyrosine phosphorylation and association with PLC gamma, suggesting direct interaction of the neu kinase with PLC gamma. This possibility was examined by employing a chimeric protein composed of the extracellular ligand-binding domain of the epidermal growth factor receptor and the neu cytoplasmic portion. The chimeric receptor mediated rapid ligand-dependent modification of PLC gamma on tyrosine residues. It also physically associated, in a ligand-dependent manner, with the phosphoinositidase. Based on the presented results we suggest that the mechanism of cellular transformation by the neu/HER2 receptor involves tyrosine phosphorylation and activation of PLC gamma.