Transcriptional activation by CLOCK-CYCLE (CLK-CYC) heterodimers and repression by PERIOD-TIMELESS (PER-TIM) heterodimers are essential for circadian oscillator function in Drosophila. PER-TIM was previously found to interact with CLK-CYC to repress transcription, and here we show that this interaction inhibits binding of CLK-CYC to E-box regulatory elements in vivo. Coincident with the interaction between PER-TIM and CLK-CYC is the hyperphosphorylation of CLK. This hyperphosphorylation occurs in parallel with the PER-dependent entry of DOUBLE-TIME (DBT) kinase into a complex with CLK-CYC, where DBT destabilizes both CLK and PER. Once PER and CLK are degraded, a novel hypophosphorylated form of CLK accumulates in parallel with E-box binding and transcriptional activation. These studies suggest that PER-dependent rhythms in CLK phosphorylation control rhythms in E-box-dependent transcription and CLK stability, thus linking PER and CLK function during the circadian cycle and distinguishing the transcriptional feedback mechanism in flies from that in mammals.