Contact-inhibited 3T3 mouse fibroblast cells, in contrast to logarithmically growing 3T3 cells and SV-3T3 transformed cells, have increased levels of plasma membrane-bound phosphodiesterase (oligonucleotidase, E.C.3.1.4.19; nucleotide pyrophosphatase, E.C. 3.6.1.9) activity. The increase in enzyme, recorded as increased specific activity, is reversible, as evidenced by the return to normal values following dilution of confluent 3T2 cells and re-initiation of growth. Increased enzyme activity is induced again when the cells regain the confluent state. Transformed SV-3T3 cells can be induced to mimic the contact inhibited state, including increased plasma membrane phosphodiesterase activity, by exposure to a combination of: (i) agents that are known to induce increased intracellular cAMP levels and (ii) additions of purified 3T3 or SV-3T3 plasma membranes. Additions of either alone fails to induce the increase in membrane phosphodiesterase activity, although each alone can significantly suppress cell growth, as measured by incorporation of 3H amino acids. We suggest that the elevation of plasma membrane phosphodiesterase activity may serve as a measure of conversion to the contact-inhibited state in both normal cells and phenotypically reverted transformed cells.