Lactase–phlorizin hydrolase (LPH), a major digestive enzyme in the small intestine of newborns, is synthesized as a high-molecular-mass precursor comprising four tandemly repeated domains. Proteolytic cleavage of the precursor liberates the pro segment (LPHα) corresponding to domains I and II and devoid of known enzymic function. The mature enzyme (LPHβ) comprises domains III and IV and is anchored in the brush border membrane via a C-terminal hydrophobic segment. To analyse the roles of the different domains of LPHα and LPHβ, and the interactions between them, we have engineered a series of modified derivatives of the rat LPH precursor. These were expressed in cultured cells under the control of a cytomegalovirus promoter. The results show that recombinant LPHβ harbouring both domains III and IV produces lactase activity. Neither domain III nor IV is alone sufficient to generate active enzyme, although the corresponding proteins are transport-competent. Tandem duplication of domains III or IV did not restore lactase activity, demonstrating the separate roles of both domains within LPHβ. Further, the development of lactase activity did not require LPHα; however, LPHα potentiated the production of active LPHβ but the individual LPHα subdomains I and II were unable to do so. Lactase activity and targeting required the C-terminal transmembrane anchor of LPH; this requirement was not satisfied by the signal/anchor region of another digestive enzyme: sucrase–isomaltase. On the basis of this study we suggest that multiple levels of intramolecular interactions occur within the LPH precursor to produce the mature enzyme, and that the repeat domains of the precursor have distinct and specific functions in protein processing, substrate recognition and catalysis. We propose a functional model of LPHβ in which substrate is channelled from an entry point located within domain III to the active site located in domain IV.