The acyl coenzyme A (CoA) binding protein AcbA is cleaved to form a peptide (SDF-2) that coordinates spore encapsulation during the morphogenesis of Dictyostelium discoideum fruiting bodies. We present genetic evidence that the misspecification of cell types seen in mutants of the serine protease/ABC transporter TagA results from the loss of normal interactions with AcbA. Developmental phenotypes resulting from aberrant expression of the TagA protease domain, such as the formation of supernumerary tips on aggregates and the production of excess prestalk cells, are suppressed by null mutations in the acbA gene. Phenotypes resulting from the deletion of tagA, such as overexpression of the prestalk gene ecmB and the misexpression of the prespore gene cotB in stalk cells, are also observed in acbA mutants. Moreover, tagA- mutants fail to produce SDF-2 during fruiting body morphogenesis but are able to do so if they are stimulated with exogenous SDF-2. These results indicate that the developmental program depends on TagA and AcbA working in concert with each other during cell type differentiation and suggest that TagA is required for normal SDF-2 signaling during spore encapsulation.