pref-1 is an epidermal growth factor-like repeat protein present on the surface of preadipocytes that functions in the maintenance of the preadipose state. pref-1 expression is completely abolished during 3T3-L1 adipocyte differentiation. Bypassing this downregulation by constitutive expression of full-length transmembrane pref-1 in preadipocytes drastically inhibits differentiation. For the first time, we show processing of cell-associated pref-1 to generate both a soluble pref-1 protein of approximately 50 kDa that corresponds to the ectodomain and also smaller products of 24 to 25 kDa and 31 kDa. Furthermore, while all four of the alternately spliced forms of pref-1 produce cell-associated protein, only the two largest of the four alternately spliced isoforms undergo cleavage in the juxtamembrane region to release the soluble 50-kDa ectodomain. We demonstrate that addition of Escherichia coli-expressed pref-1 ectodomain to 3T3-L1 preadipocytes blocks differentiation, thus overriding the adipogenic actions of dexamethasone and methylisobutylxanthine. The inhibitory effects of the pref-1 ectodomain are blocked by preincubation of the protein with pref-1 antibody. That the ectodomain alone is sufficient for inhibition demonstrates that transmembrane pref-1 can be processed to generate an inhibitory soluble form, thereby greatly extending its range of action. Furthermore, we present evidence that alternate splicing is the mechanism that governs the production of transmembrane versus soluble pref-1, thereby determining the mode of action, juxtacrine or paracrine, of the pref-1 protein.