Interaction of interferon alpha (IFN alpha) with its cell surface receptor rapidly activates the formation of the transcription complex ISGF3, which subsequently translocates to the nucleus and stimulates the expression of a variety of early response genes. We have recently developed a cell-free system where IFN alpha can activate the formation of ISGF3 in vitro. This system has enabled us to demonstrate that the component of the ISGF3 transcription complex which is modified by IFN alpha treatment (ISGF3 alpha) is membrane-associated and that its activation involves a protein kinase. Using a combination of specific tyrosine kinase and phosphatase inhibitors and monoclonal anti-phosphotyrosine antibodies we now are able to demonstrate that IFN alpha-activated transcription involves at least a two-step process where a membrane-associated tyrosine phosphatase and a tyrosine kinase lead to modification of ISGF3 alpha and subsequent formation of the complete complex. Furthermore, formation of the ISGF3 complex is specifically disrupted by protein tyrosine phosphatase and can be reversibly dissociated by the phosphotyrosine analogue phenylphosphate. The latter observation suggested that SH2 and/or SH3 domains may be required for the stable formation of this transcription complex.