Thrombomodulin is an anticoagulant protein cofactor that modulates the substrate specificity of thrombin and promotes the cleavage of protein C. The structure-function relationships of the thrombin-thrombomodulin interaction have been explored by recombinant DNA and protein chemistry methods. Thrombomodulin binds to thrombin at an anion-binding exosite on the carboxyl-terminal side of the substrate binding cleft. This interaction interferes with the recognition and cleavage of fibrinogen, factor V, and the platelet thrombin receptor. Binding to thrombomodulin also protects thrombin from inhibition by heparin cofactor II. The major thrombin binding site on thrombomodulin consists of EGF-like domains 5 and 6. In addition, EGF-like domain 4 is required for thrombomodulin to accelerate the activation of protein C. Some thrombomodulin molecules contain a chondroitin sulfate moiety attached to a Ser/Thr-rich domain adjacent to the cell membrane. This modification is not required for the cofactor activity of thrombomodulin, but appears to contribute to 'direct anticoagulant' activity--the ability of thrombomodulin to inhibit fibrinogen clotting, factor V activation, and platelet activation. The chondroitin sulfate moiety of thrombomodulin also can affect the rate of thrombin inhibition by antithrombin III, possibly by competing with heparin for the heparin binding site on thrombin. Detailed understanding of these interactions could lead to new strategies for the treatment of bleeding or thrombotic disorders.