IRS‐1 undergoes rapid tyrosine phosphorylation during insulin stimulation and forms a stable complex containing the 85 kDa subunit (p85) of the phosphatidylinositol (PtdIns) 3′‐kinase, but p85 is not tyrosyl phosphorylated. IRS‐1 contains nine tyrosine phosphorylation sites in YXXM (Tyr‐Xxx‐Xxx‐Met) motifs. Formation of the IRS‐1‐PtdIns 3′‐kinase complex in vitro is inhibited by synthetic peptides containing phosphorylated YXXM motifs, suggesting that the binding of PtdIns 3′‐kinase to IRS‐1 is mediated through the SH2 (src homology‐2) domains of p85. Furthermore, overexpression of IRS‐1 potentiates the activation of PtdIns 3‐kinase in insulin‐stimulated cells, and tyrosyl phosphorylated IRS‐1 or peptides containing phosphorylated YXXM motifs activate PtdIns 3′‐kinase in vitro. We conclude that the binding of tyrosyl phosphorylated IRS‐1 to the SH2 domains of p85 is the critical step that activates PtdIns 3′‐kinase during insulin stimulation.