Photoaffinity labeling techniques have recently demonstrated that mammalian beta 1- and beta 2-adrenergic receptors reside on peptides of Mr 62 000-64 000. These receptor peptides are susceptible to endogenous metalloproteinases which produce peptides of Mr 30 000-55 000. Several proteinase inhibitors markedly attenuate this process, specifically EDTA and EGTA. In this study we investigated the functional significance of this proteolysis (and its inhibition) in the beta 2-adrenergic receptor-adenylate cyclase system derived from rat lung membranes. Membrane preparations containing proteolytically derived fragments of the receptor of Mr 40 000-55 000 are fully functional with respect to their ability to bind beta-adrenergic antagonist radioligands such as [3H]dihydroalprenolol and beta-adrenergic antagonist photoaffinity reagents such as p-azido-m-[125I]iodobenzylcarazolol. They retain the ability to form a high-affinity, agonist-promoted, guanine nucleotide-sensitive complex thought to represent a ternary complex of agonist, receptor and guanine nucleotide regulatory protein. Nonetheless, after proteolysis, GTP is less able to revert this high-affinity receptor complex to one of lower affinity, and all aspects of adenylate cyclase stimulation are reduced. In addition, the functional integrity of the N protein in membranes prepared without proteinase inhibitors is reduced as assessed by reconstitution studies with the cyc- variant of S49 lymphoma cell membranes. These results suggest that endogenous proteolysis does not directly impair the ability of beta-adrenergic receptors to either bind ligands or interact with the guanine nucleotide regulatory protein. However, they imply that endogenous proteolysis likely impairs the functionality of other components of the adenylate cyclase system, such as the nucleotide regulatory protein.