The circadian oscillator generates a rhythmic output with a period of about 24 hours. Despite extensive studies in several model systems, the biochemical mode of action has not yet been demonstrated for any of its components. Here, the Drosophila CLOCK protein was shown to induce transcription of the circadian rhythm genes period and timeless. dCLOCK functioned as a heterodimer with a Drosophila homolog of BMAL1. These proteins acted through an E-box sequence in the period promoter. The timeless promoter contains an 18-base pair element encompassing an E-box, which was sufficient to confer dCLOCK responsiveness to a reporter gene. PERIOD and TIMELESS proteins blocked dCLOCK's ability to transactivate their promoters via the E-box. Thus, dCLOCK drives expression of period and timeless, which in turn inhibit dCLOCK's activity and close the circadian loop.