Viral infection results in transcriptional activation of the cellular interferon alpha/beta-stimulated genes (ISGs) independent of the autocrine action of interferon alpha/beta (IFN-alpha/beta). Induction of ISG expression by virus appears to be mediated through production of viral double-stranded RNA (dsRNA). Previously, we identified two novel dsRNA-activated factors (DRAFs) that bind to the interferon-stimulated response element (ISRE), the DNA sequence that mediates transcriptional activation by IFN-alpha/beta In this report we define sequences that flank the classical ISRE to be necessary for DRAF1 binding. More significantly, it is shown that the sequences required to bind DRAF1 correlate with the ability to mediate ISG induction by virus. These results strongly suggest that DRAF1 is a positive regulator of ISG transcription. DRAF1 is shown to bind selectively to the promoters of those ISGs which are strongly induced by viral infection, again suggesting the functional significance of this factor. UV cross-linking experiments indicate that DRAF1 and DRAF2 share a common DNA-binding subunit of approximately 70 kDa which is referred to as the DRAF binding component (DRAF(B)). DRAF(B) is shown to preexist in the cytoplasm of unstimulated cells. Consistent with this observation, both DRAF1 and DRAF2 are activated in the cytoplasm prior to nuclear translocation.