Amplification and/or overexpression of HER2/neu and HER3 genes have been implicated in the development of cancer in humans. The fact that these receptor tyrosine kinases (RTKs) are frequently coexpressed in tumor-derived cell lines and that heterodimers form high affinity binding sites for heregulin (HRG) suggests a novel mechanism for signal definition, diversification or amplification. In cells expressing HER2 and HER3, tyrosine phosphorylation of HER3 is markedly increased upon exposure to recombinant HRG. ATP binding site mutants of HER2 and HER3 demonstrate transphosphorylation of HER3 by HER2, but not vice versa. HRG-induced transphosphorylation of HER3 results in a substrate phosphorylation pattern distinct from HER2 cells and enhances association of the receptor with SHC and phosphoinositol 3-kinase in transfected 293 and mammary carcinoma-derived MCF-7 cells. The physiological relevance of HER2/HER3 heterodimerization is demonstrated by HRG-dependent transformation of NIH 3T3 cells coexpressing the two receptors. These findings demonstrate the acquisition of expanded signaling capacities for HER2 by HRG-induced heterodimerization with HER3 and provide a molecular basis for the involvement of receptor heteroactivation in the development of human malignancies.