Regulated ectodomain shedding followed by intramembrane proteolysis has recently been recognized as important in cell signaling and for degradation of several type I transmembrane proteins. The receptor-tyrosine kinase Tie1 is known to undergo ectodomain cleavage generating a membrane-tethered endodomain. Here we show Tie1 is a substrate for regulated intramembrane proteolysis. After Tie1 ectodomain cleavage the newly formed 45-kDa endodomain undergoes additional proteolytic processing mediated by gamma-secretase to generate an amino-terminal-truncated 42-kDa fragment that is subsequently degraded by proteasomal activity. This sequential processing occurs constitutively and is stimulated by phorbol ester and vascular endothelial growth factor. To assess the biological significance of regulated Tie1 processing, we analyzed its effects on angiopoietin signaling. Activation of ectodomain cleavage causes loss of phosphorylated Tie1 holoreceptor and generation of phosphorylated receptor fragments in the presence of cartilage oligomeric protein angiopoietin 1. A key function of gamma-secretase is in preventing accumulation of these phosphorylated fragments. We also find that regulated Tie1 processing modulates ligand responsiveness of the Tie-1-associated receptor Tie2. Activation of Tie1 ectodomain cleavage increases cartilage oligomeric protein angiopoietin 1 activation of Tie2. This correlates with increased ability of Tie2 to bind ligand after shedding of the Tie1 extracellular domain. A similar enhancement of ligand activation of Tie2 is seen when Tie1 expression is suppressed by RNA interference. Together these data indicate that Tie1, via its extracellular domain, limits the ability of ligand to bind and activate Tie2. Furthermore the data suggest that regulated processing of Tie1 may be an important mechanism for controlling signaling by Tie2.