N-myristoylated viral polypeptide mu-1 was produced in COS cells transfected with a transient expression vector containing a DNA copy of the reovirus M2 gene. The mu-1 product was specifically cleaved to polypeptide mu-1C in cells that were cotransfected with the reovirus S4 gene and that expressed polypeptide sigma-3. Studies with site-specific mutants of the M2 gene demonstrated that conversion of mu-1 to mu-1C was dependent on myristoylation and the presence of the proteolytic cleavage sequence asparagine 42-proline 43 in mu-1, as well as on the presence of polypeptide sigma-3. The mu-1C product and polypeptide sigma-3 formed complexes that were immunoprecipitated by sigma-3-directed antibody, and a myristoylation-negative M2 double mutant, G2A-N42T, yielded mu-1 that did not undergo cleavage to mu-1C or bind sigma-3. However, the N42T single mutant did form immunoprecipitable complexes with sigma-3, indicating that binding can occur in the absence of cleavage. Polypeptide sigma-3 alternatively can bind double-stranded RNA and in COS cells stimulates translation of reporter chloramphenicol acetyltransferase mRNA translation, presumably by blocking double-stranded RNA-mediated activation of the eukaryotic initiation factor 2 alpha-subunit kinase which inhibits the initiation of protein synthesis. Consistent with these observations and with the formation of mu-1C-sigma-3 complexes, coexpression of M2 with S4 DNA prevented the translational stimulatory effect of polypeptide sigma-3.