Chromatin insulators interfere with enhancer-promoter interactions and can buffer transgenes from chromosomal position effects. To explain these properties, we have proposed that insulators organize the chromatin fiber within the eukaryotic nucleus, setting up higher order domains of chromatin organization that allow independent transcriptional regulation of genes within each domain. In addition to insulators, proteins contribute to the maintenance on this nuclear organization. Proteins that affect transvection-and are therefore thought to mediate chromosome pairing during interphase-also affect insulator function, suggesting a role for these proteins in nuclear organization. In addition, covalent modification of histories might be another factor contributing to the maintenance of nuclear organization. The Drosophila homolog of the mammalian SET oncoprotein appears to regulate histone H3 phosphorylation. SET is an inhibitor of phosphatase 2A (PP2A) and a component of the histone acetylation inhibitor INHAT complex. The Drosophila SET protein is present at sites of phosphorylated histone H3 and absent from sites of acetylated histories H3 and H4, but it does not overlap with gypsy insulator sites. We have studied in detail the role of SET and PP2A in histone H3 phosphorylation. Phosphorylated histone H3 is widely distributed on Drosophila polytene chromosomes and is especially abundant at sites of active transcription. After heat shock, when transcription of all genes is turned off and the heat shock genes are activated, phosphorylated H3 disappears from all sites on polytene chromosomes and is abundantly present at the heat shock loci. Okadeic acid, an inhibitor of PP2A, interferes with histone H3 dephosphorylation after heat shock. The same results are observed in flies mutant in one of several PP2A subunits, suggesting that PP2A controls histone H3 dephosphorylation. In agreement with this, SET is observed at the heat shock puffs at the same time as phosphorylated H3, and mutations in SET interfere with accumulation of phosphorylated H3 at the heat shock puffs. These results suggest a correlation between transcriptional activation and H3 p1osphorylation. Furthermore, H3 phosphorylation is controlled by an interplay between SET and PP2A.