Mutations in the nonreceptor tyrosine kinase Btk result in the B cell immunodeficiencies X-linked agammaglobulinemia (XLA) in humans and X-linked immunodeficiency (xid) in mice. Genetic and biochemical evidence implicates Btk as a key component of several B cell signaling pathways. Activation of Btk by a point mutation (E41K) within the PH domain (Btk*) results in fibroblast transformation and is correlated with increased membrane localization of Btk. When wild type Btk is activated by coexpression with Lyn, the tyrosine phosphorylated pool of Btk is highly enriched in the membrane fraction. To determine whether membrane association is sufficient to activate Btk, we targeted Btk to the plasma membrane using a series of fusion proteins including GagBtk, CD16Btk and CD4Btk. Constitutive membrane association greatly enhanced the ability of Btk to transform Rat2 fibroblasts in the presence of high levels of Src activity. All membrane targeted forms of Btk were highly tyrosine phosphorylated. Transformation required membrane localization, Btk kinase activity, transphosphorylation by Src family kinases, and an intact SH2 domain but not the PH or SH3 domains. These data suggest that membrane localization is a critical early step in Btk activation.