Steroid hormones fulfil important functions in animal development. In Drosophila, ecdysone triggers moulting and metamorphosis through its effects on gene expression. Ecdysone works by binding to a nuclear receptor, EcR, which heterodimerizes with the retinoid X receptor homologue Ultraspiracle. Both partners are required for binding to ligand or DNA. Like most DNA-binding transcription factors, nuclear receptors activate or repress gene expression by recruiting co-regulators, some of which function as chromatin-modifying complexes. For example, p160 class coactivators associate with histone acetyltransferases and arginine histone methyltransferases. The Trithorax-related gene of Drosophila encodes the SET domain protein TRR. Here we report that TRR is a histone methyltransferases capable of trimethylating lysine 4 of histone H3 (H3-K4). trr acts upstream of hedgehog (hh) in progression of the morphogenetic furrow, and is required for retinal differentiation. Mutations in trr interact in eye development with EcR, and EcR and TRR can be co-immunoprecipitated on ecdysone treatment. TRR, EcR and trimethylated H3-K4 are detected at the ecdysone-inducible promoters of hh and BR-C in cultured cells, and H3-K4 trimethylation at these promoters is decreased in embryos lacking a functional copy of trr. We propose that TRR functions as a coactivator of EcR by altering the chromatin structure at ecdysone-responsive promoters.