In Drosophila, the signaling pathway mediated by the Toll receptor is critical for the establishment of embryonic dorso-ventral pattern and for innate immune responses to bacterial and fungal pathogens. Toll is activated by high affinity binding of the cytokine Spätzle, a dimeric ligand of the cystine knot family. In vertebrates, a related family of Toll-like receptors play a critical role in innate immune responses. Despite the importance of this family of receptors, little is known about the biochemical events that lead to receptor activation and signaling. Here, we show that Spätzle binds to the N-terminal region of Toll and, using biophysical methods, that the binding is complex. The two binding events that cause formation of the cross-linked complex are non-equivalent: the first Toll ectodomain binds Spätzle with an affinity 3-fold higher than the second molecule suggesting that pathway activation involves negative cooperativity. We further show that the Toll ectodomains are able to form low affinity dimers in solution and that juxtamembrane sequences of Toll are critical for the activation or derepression of the pathway. These results, taken together, suggest a mechanism of signal transduction that requires both ligand-receptor and receptor-receptor interactions.