Recent work indicates that defects in late phases of the endosomal pathway caused by loss of function of the tumour suppressor gene lethal (2) giant discs (lgd) or the function of the ESCRT complexes I-III result in the ligand-independent activation of the Notch pathway in all imaginal disc cells in Drosophila melanogaster. lgd encodes a member of an uncharacterised protein family, whose members contain one C2 domain and four repeats of the DM14 domain. The function of the DM14 domain is unknown. We here report a detailed structure-function analysis of Lgd protein, which reveals that the DM14 domains are essential for the function of Lgd and act in a redundant manner. Moreover, our analysis indicates that the DM14 domain provides the specific function, whereas the C2 domain is required for the subcellular location of Lgd. We found that Lgd interacts directly with the ESCRT-III subunit Shrub through the DM14 domains. The interaction is required for the function of Shrub, indicating that Lgd contributes to the function of the ESCRT-III complex. Furthermore, our genetic studies indicate that the activation of Notch in ESCRT and lgd mutant cells occurs in a different manner and that the activity of Shrub and other ESCRT components are required for the activation of Notch in lgd mutant cells.