The LAG-2 membrane protein is a putative signaling ligand for the LIN-12 and GLP-1 receptors of Caenorhabditis elegans. LAG-2, like its Drosophila homologues Delta and Serrate, acts in a conserved signal transduction pathway to regulate cell fates during development. In this article, we investigate the functional domains of LAG-2. For the most part, mutants were constructed in vitro and assayed for activity in transgenic animals. We find a functional role for all major regions except one. Within the extracellular domain, the N-terminal region, which bears no known motif, and the DSL domain are both required. By contrast, the region bearing epidermal growth factor-like repeats can be deleted with no apparent reduction in rescuing activity. The intracellular region is not required for activity but instead plays a role in down-regulating LAG-2 function. Finally, membrane association is critical for mutant rescue.