Three cell-surface proteins have been recognized as components of the mammalian signaling receptor for bacterial lipopolysaccharide (LPS): CD14, Toll-like receptor-4 (TLR4), and MD-2. Biochemical and visual studies shown here demonstrate that the role of CD14 in signal transduction is to enhance LPS binding to MD-2, although its expression is not essential for cellular activation. These studies clarify how MD-2 functions: we found that MD-2 enables TLR4 binding to LPS and allows the formation of stable receptor complexes. MD-2 must be bound to TLR4 on the cell surface before binding can occur. Consequently, TLR4 clusters into receptosomes (many of which are massive) that recruit intracellular toll/IL-1/resistance domain-containing adapter proteins within minutes, thus initiating signal transduction. TLR4 activation correlates with the ability of MD-2 to bind LPS, as MD-2 mutants that still bind TLR4, but are impaired in the ability to bind LPS, conferred a greatly blunted LPS response. These findings help clarify the earliest events of TLR4 triggering by LPS and identify MD-2 as an attractive target for pharmacological intervention in endotoxin-mediated diseases.