p105 and p98 precursor proteins play an active role in NF-kappa B-mediated signal transduction. The Rel/NF-kappa B family of transcription factors is composed of two distinct subgroups, proteins that undergo proteolytic processing and contain SWI6/ankyrin repeats in their carboxyl termini (p105, p98), and those without such repeats that do not require processing (p65, c-Rel, RelB, and Dorsal). We demonstrate that the p105 and p98 precursors share functional properties with the I kappa B proteins, which also contain SWI6/ankyrin repeats. Both p105 and p98 were found to form stable complexes with other Rel/NF-kappa B family members, including p65 and c-Rel. Association with the precursors is sufficient for cytoplasmic retention of either p65 or c-Rel, both of which are otherwise nuclear. These complexes undergo stimulus-responsive processing to produce active p50/c-Rel and p55/c-Rel complexes. These observations suggest a second pathway leading to NF-kappa B induction, in which processing of the precursors rather than phosphorylation of I kappa B plays a major role.