In HER2-overexpressing mammary epithelial cells, transforming growth factor beta (TGF-beta) activated phosphatidylinositol-3 kinase (PI3K)/Akt and enhanced survival and migration. Treatment with TGF-beta or expression of an activated TGF-beta type I receptor (Alk5 with the mutation T204D [Alk5(T204D)]) induced phosphorylation of TACE/ADAM17 and its translocation to the cell surface, resulting in increased secretion of TGF-alpha, amphiregulin, and heregulin. In turn, these ligands enhanced the association of p85 with ErbB3 and activated PI3K/Akt. RNA interference of TACE or ErbB3 prevented TGF-beta-induced activation of Akt and cell invasiveness. Treatment with TGF-beta or expression of Alk5(T204D) in HER2-overexpressing cells reduced their sensitivity to the HER2 antibody trastuzumab. Inhibition of Alk5, PI3K, TACE, or ErbB3 restored sensitivity to trastuzumab. A gene signature induced by Alk5(T204D) expression correlated with poor clinical outcomes in patients with invasive breast cancer. These results suggest that by acting on ErbB ligand shedding, an excess of TGF-beta may result in (i) conditioning of the tumor microenvironment with growth factors that can engage adjacent stromal and endothelial cells; (ii) potentiation of signaling downstream ErbB receptors, thus contributing to tumor progression and resistance to anti-HER2 therapies; and (iii) poor clinical outcomes in women with breast cancer.