Bacterial lipopolysaccharide (LPS) activates the innate immune system by forming a complex with myeloid differentiation factor 2 (MD-2) and Toll-like receptor 4 (TLR4), which is present on antigen presenting cells. MD-2 plays an essential role in this activation of the innate immune system as a member of the ternary complex, TLR4:MD-2:LPS. With the goal of further understanding the molecular details of the interaction of MD-2 with LPS and TLR4, and possibly toward engineering dominant negative regulators of the MD-2 protein, here we subjected MD-2 to a mutational analysis using yeast display. The approach included generation of site-directed alanine mutants, and ligand-driven selections of MD-2 mutant libraries. Our findings showed that: (1) proline mutations in the F119-K132 loop that binds LPS were strongly selected for enhanced yeast surface stability, (2) there was a preference for positive-charged side chains (R/K) at residue 120 for LPS binding, and negative-charged side chains (D/E) for TLR4 binding, (3) aromatic residues were strongly preferred at F119 and F121 for LPS binding, and (4) an MD-2 mutant (T84N/D101A/S118A/S120D/K122P) exhibited increased binding to TLR4 but decreased binding to LPS. These studies revealed the impact of specific residues and regions of MD-2 on the binding of LPS and TLR4, and they provide a framework for further directed evolution of the MD-2 protein.