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.