Cathepsin S is a cysteine protease with potent endoproteolytic activity and a broad pH profile. Cathepsin S activity is essential for complete processing of the MHC class II-associated invariant chain within B cells and dendritic cells, and may also be important in extracellular matrix degradation in atherosclerosis and emphysema. Unique among cysteine proteases, cathepsin S activity is up-regulated by IFN-gamma. Given its importance, we sought to elucidate the pathway by which IFN-gamma increases cathepsin S expression. Our data demonstrate that the cathepsin S promoter contains an IFN-stimulated response element (ISRE) that is critical for IFN-gamma-induced gene transcription in a cell line derived from type II alveolar epithelial (A549) cells. IFN response factor (IRF)-2 derived from A549 nuclear extracts associates with the ISRE oligonucleotide in gel shift assays, but is quickly replaced by IRF-1 following stimulation with IFN-gamma. The time course of IRF-1/ISRE complex formation correlates with increased levels of IRF-1 protein and cathepsin S mRNA. Overexpression of IRF-1, but not IRF-2, markedly augments cathepsin S promoter activity in A549 cells. Furthermore, overexpression of IRF-1 increases endogenous cathepsin S mRNA levels in 293T epithelial cells. Finally, freshly isolated bone marrow cells from IRF-1(-/-) mice fail to up-regulate cathepsin S activity in response to IFN-gamma. Thus, IRF-1 is the critical transcriptional mediator of IFN-gamma-dependent cathepsin S activation. These data elucidate a new pathway by which IRF-1 may affect MHC class II processing and presentation.