Although the biological activity of the insect moulting hormone ecdysone, is manifested through a hormonally regulated transcriptional cascade associated with chromosomal puffing, a direct association of the receptor with the puff has yet to be established. The cloned ecdysone receptor (EcR) is by itself incapable of high-affinity DNA binding or transcriptional activation. Rather, these activities are dependent on heterodimer formation with Ultraspiracle (USP) the insect homologue of vertebrate retinoid X receptor. Here we report that native EcR and USP are co-localized on ecdysone-responsive loci of polytene chromosomes. Moreover, we show that natural ecdysones selectively promote physical association between EcR and USP, and conversely, that high-affinity hormone binding requires both EcR and USP. Replacement of USP with retinoid X receptor produces heterodimers with distinct pharmacological and functional properties. These results redefine the ecdysone receptor as a dynamic complex whose activity may be altered by combinatorial interactions among subunits and ligand.