Phosphatidylinositol 3′-kinase (PI 3′-kinase) is activated in insulin-stimulated cells by the binding of the SH2 domains in its 85-kDa regulatory subunit to insulin receptor substrate-1 (IRS-1). We have previously shown that both tyrosyl-phosphorylated IRS-1 and mono-phosphopeptides containing a single Y XX M motif activate PI 3′-kinase in vitro . However, activation by the mono-phosphopeptides was significantly less potent than activation by the multiply phosphorylated IRS-1. We now show that the increased potency of PI 3′-kinase activation by IRS-1 relative to phosphopeptide is not due to tertiary structural features IRS-1, as PI 3′-kinase is activated normally by denatured, reduced, and carboxymethylated IRS-1. Furthermore, activation of PI 3′-kinase by bis-phosphorylated peptides containing two Y XX M motifs is 100-fold more potent than the corresponding mono-phosphopeptides and similar to activation by IRS-1. These data suggest that tyrosyl-phosphorylated IRS-1 or bis-phosphorylated peptides bind simultaneously to both SH2 domains of p85. However, these data cannot differentiate between an activation mechanism that requires two-site occupancy for maximal activity as opposed to one in which bivalent binding enhances the occupancy of a single activating site. To distinguish between these possibilities, we produced recombinant PI 3′-kinase containing either wild-type p85 or p85 mutated in its N-terminal, C-terminal, or both SH2 domains. We find that mutation of either SH2 domains significantly reduced phosphopeptide binding and decreased PI 3′-kinase activation by 50%, whereas mutation of both SH2 domains completely blocked binding and activation. These data provide the first direct evidence that full activation of PI 3′-kinase by tyrosyl-phosphorylated proteins requires occupancy of both SH2 domains in p85.