The epidermal growth factor receptor (EGF-R) is known to transmodulate the activity and level of the erbB-2/neu protein in several epithelial cell lines. We therefore determined which structural features of the EGF-R were important in transmodulating erbB-2. We found that the addition of EGF to nontransformed epithelial cells resulted in down-regulation of erbB-2 with the same kinetics and similar extent as the EGF-R. By using cells expressing a series of EGF-R modified by site-directed mutagenesis, we found that EGF-R tyrosine kinase activity was not necessary for down-regulation of erbB-2, but receptor sequences between 899 and 958 in the EGF-R were required. To determine whether transmodulation was associated with activation of erbB-2, tyrosine phosphorylation of erbB-2 was determined following addition of EGF. Again, phosphorylation of erbB-2 following EGF addition did not require the intrinsic tyrosine kinase activity of the EGF-R, but did require sequences between 899 and 958. To determine the localization of EGF-R and erbB-2 following EGF addition, the relative distribution of the two receptors was evaluated by fluorescence microscopy. Surprisingly, the majority of erbB-2 was found in small cytoplasmic vesicles, whereas the EGF-R was predominantly found on the cell surface. Addition of EGF resulted in a redistribution and consequent colocalization of both receptors in endosomal and lysosomal structures. We conclude that activation and transmodulation of erbB-2 does not require intrinsic tyrosine kinase activity of the EGF-R, but does require sequences in the EGF-R which regulate its trafficking.