The insertion sequence IS903 has perfect, 18-base-pair terminal repeats that are the presumed binding sites of its transposase. We have isolated mutations throughout this inverted repeat and analyzed their effect on transposition. We show that every position in the inverted repeat (with the possible exception of position 4) is important for efficient transposition. Furthermore, various substitutions at a single position can have a wide range of effects. Analysis of these hierarchical effects suggests that transposase contacts the minor groove in the region from position 13 to position 16 but makes major groove (or more complex) interactions with the outer portion of the inverted repeat. Our data indicate that the transposase exhibits relaxed specificity for the "second" end of a transposed segment; the defect in transposition of virtually all mutant inverted repeats can be rescued by a wild-type end. However, this rescue exhibits a pronounced position effect; in most cases, it is efficient only when the wild-type end is close to the 3' end of the transposase gene. This confirms the cis-acting nature of the transposase protein and suggests the initial transposase-inverted repeat interaction is the rate-limiting step in transposition. From the behavior of transposons with one mutant and one wild-type end, we infer that the inverted repeat contains two functional domains--one for initial complex formation with transposase and the other for effective completion of transpositional recombination. To support this hypothesis we show that an end with a mutation in one domain can significantly rescue an end with a mutation in the other domain.