Sensory ray morphogenesis in C. elegans requires active cellular interaction regulated by multiple genetic activities. We report here the cloning of one of these genes, dpy-11, which encodes a membrane-associated thioredoxin-like protein. The DPY-11 protein is made exclusively in the hypodermis and resides in the cytoplasmic compartment. Whereas the TRX domain of DPY-11 displays a catalytic activity in vitro, mapping of lesions in different mutant alleles and functional analysis of deletion transgenes reveal that both this enzymatic activity and transmembrane topology are essential for determining body shape and ray morphology. Based on the abnormal features in both the expressing and non-expressing ray cells, we propose that the DPY-11 is required in the hypodermis for modification of its substrates. In turn, ray cell interaction and the whole morphogenetic process can be modulated by these substrate molecules.