Neuregulins are a multi-isoform family of growth factors that activate members of the erbB family of receptor tyrosine kinases. The membrane-anchored isoforms contain the receptor-activating ligand in their extracellular domain, a single membrane-spanning region, and a long cytoplasmic tail. To evaluate the potential biological role of the intracellular domain of the membrane-anchored neuregulin isoforms, we used a domain-specific gene disruption approach to produce a mouse line in which only the region of the neuregulin gene encoding almost the entire intracellular domain was disrupted. Consistent with previous reports in which all neuregulin isoforms were disrupted, the resulting homozygous neuregulin mutants died at E10.5 of circulatory failure and displayed defects in neural and cardiac development. To further understand these in vivo observations, we evaluated a similarly truncated neuregulin construct after transient expression in COS-7 cells. This cytoplasmic tail-deleted mutant, unlike wild-type neuregulin isoforms, was resistant to proteolytic release of its extracellular-domain ligand, a process required for erbB receptor activation. Thus, proteolytic processing of the membrane-bound neuregulin isoforms involved in cranial ganglia and heart embryogenesis is likely developmentally regulated and is critically controlled by their intracellular domain. This observation indicates that erbB receptor activation by membrane-bound neuregulins most likely involves a unique temporally and spatially regulated “inside-out” signaling process that is critical for processing and release of the extracellular-domain ligand.