Mullerian inhibiting substance (MIS) is a differentiation factor that causes the Mullerian duct to regress during the development of the male reproductive tract. The active form is a disulfide-linked dimer consisting of two identical 70-kDa subunits. Recently, the amino acid sequence for MIS was deduced from its gene sequence and revealed that the carboxyl-terminal region shares homology with transforming growth factor (TGF)-beta. Since TGF-beta is produced as a large latent precursor that requires proteolytic activation for activity, we sought to determine if MIS might undergo a similar processing event. Here we demonstrate that typically 5 to 20% of the protein in MIS preparations is cleaved at a site 109 amino acids from the carboxyl terminus. Concurrent cleavages from both chains of the MIS dimer produces a 25-kDa TGF-beta-like fragment and a high molecular mass complex derived from the amino terminus of the protein. Although the two fragments are noncovalently linked, they remain tightly associated after cleavage, and thus are structurally organized like TGF-beta within its precursor. The same cleavage products also can be generated by limited proteolysis with plasmin, which provides a simple method for converting the entire preparation into the cleaved form. The plasmin-digested MIS is fully active in the organ culture assay.