IRS-1 is an insulin receptor substrate that undergoes tyrosine phosphorylation and associates with the phosphatidylinositol (PtdIns) 3'-kinase immediately after insulin stimulation. Recombinant IRS-1 protein was tyrosine phosphorylated by the insulin receptor in vitro and associated with the PtdIns 3'-kinase from lysates of quiescent 3T3 fibroblasts. Bacterial fusion proteins containing the src homology 2 domains (SH2 domains) of the 85-kDa subunit (p85) of the PtdIns 3'-kinase bound quantitatively to tyrosine phosphorylated, but not unphosphorylated, IRS-1, and this association was blocked by phosphotyrosine-containing synthetic peptides. Moreover, the phosphorylated peptides and the SH2 domains each inhibited binding of PtdIns 3'-kinase to IRS-1. Phosphorylated IRS-1 activated PtdIns 3'-kinase in anti-p85 immunoprecipitates in vitro, and this activation was blocked by SH2 domain fusion proteins. These data suggest that the interaction between PtdIns 3'-kinase and IRS-1 is mediated by tyrosine phosphorylated motifs on IRS-1 and the SH2 domains of p85, and IRS-1 activates PtdIns 3'-kinase by binding to the SH2 domains of p85. Thus, IRS-1 likely serves to transmit the insulin signal by binding and regulating intracellular enzymes containing SH2 domains.