Toll-like receptor 4 and MD-2 form a receptor for lipopolysaccharide (LPS), a major constituent of Gram-negative bacteria. MD-2 is a 20-25-kDa extracellular glycoprotein that binds to Tolllike receptor 4 (TLR4) and LPS and is a critical part of the LPS receptor. Here we have shown that the level of MD-2 expression regulates TLR4 activation by LPS. Using site-directed mutagenesis, we have found that glycosylation has no effect on MD-2 function as a membrane receptor for LPS. We used alanine-scanning mutagenesis to identify regions of human MD-2 that are important for TLR4 and LPS binding. We found that mutation in the N-terminal 46 amino acids of MD-2 did not substantially diminish LPS activation of Chinese hamster ovary (CHO) cells co-transfected with TLR4 and mutant MD-2. The residues 46-50 were important for LPS activation but not LPS binding. The residues 79-83, 121-124, and 125-129 are identified as important in LPS activation but not surface expression of membrane MD-2. The function of soluble MD-2 is somewhat more sensitive to mutation than membrane MD-2. Our results suggest that the 46-50 and 127-131 regions of soluble MD-2 bind to TLR4. The region 79-120 is not involved in LPS binding but affects monomerization of soluble MD-2 as well as TLR4 binding. We define the LPS binding region of monomeric soluble MD-2 as a cluster of basic residues 125-131. Studies on both membrane and soluble MD-2 suggest that domains of MD-2 for TLR4 and LPS binding are separate as well as overlapping. By mapping these regions on a three-dimensional model, we show the likely binding regions of MD-2 to TLR4 and LPS.