Although Rafs play a central role in signal transduction, the mechanism(s) by which they become activated is poorly understood. Raf-1 activation is dependent on the protein's ability to bind Ras, but Ras binding is insufficient to activate Raf-1 tyrosine phosphorylation to this Ras-induced activation, in the absence of an over-expressed tyrosine kinase. We demonstrate that Raf-1 purified form Sf9 cells coinfected with baculovirus Ras but not Src could be inactivated by protein tyrosine phosphatase PTP-1B. 14-3-3 and Hsp90 proteins blocked both the tyrosine dephosphorylation and inactivation of Raf-1, suggesting that Raf-1 activity is phosphotyrosine dependent. In Ras-transformed NIH 3T3 cells, a minority of Raf-1 protein was membrane associated, but essentially all Raf-1 activity and Raf-1 phosphotyrosine fractionated with plasma membranes. Thus, the tyrosine-phosphorylated and active pool of Raf-1 constitute a membrane-localized subfraction which could also be inactivated with PTP-1B. By contrast, B-Raf has aspartic acid residues at positions homologous to those of the phosphorylated tyrosines (at 340 and 341) of Raf-1 and displays a high basal level of activity. B-Raf was not detectably tyrosine phosphorylated, membrane localized, or further activated upon Ras transformation, even though B-Raf has been shown to bind to Ras in vitro. We conclude that tyrosine phosphorylation is an essential component of the mechanism by which Ras activates Raf-1 kinase activity and that steady-state activated Ras is insufficient to activate B-Raf in vivo.