BACKGROUND: The nuclear receptors (NRs) are an important class of transcription factors that are conserved across animal phyla. Canonical NRs consist of a DNA-binding domain (DBD) and ligand-binding domain (LBD). While most animals have 20-40 NRs, nematodes of the genus Caenorhabditis have experienced a spectacular proliferation and divergence of NR genes. The LBDs of evolutionarily-conserved Caenorhabditis NRs have diverged sharply from their Drosophila and vertebrate orthologs, while the DBDs have been strongly conserved. The NR2E family of NRs play critical roles in development, especially in the nervous system. In this study, we explore the phylogenetics and function of the NR2E family of Caenorhabditis elegans, using an in vivo assay to test LBD function. RESULTS: Phylogenetic analysis reveals that the NR2E family of NRs consists of three broadly-conserved clades of orthologous NRs. In C. elegans, these clades are defined by nhr-67, fax-1 and nhr-239. The vertebrate orthologs of nhr-67 and fax-1 are Tlx and PNR, respectively. While the nhr-239 clade includes orthologs in insects (Hr83), an echinoderm, and a hemichordate, the gene appears to have been lost from vertebrate lineages. The C. elegans and C. briggsae nhr-239 genes have an apparently-truncated and highly-diverged LBD region. An additional C. elegans NR2E gene, nhr-111, appears to be a recently-evolved paralog of fax-1; it is present in C. elegans, but not C. briggsae or other animals with completely-sequenced genomes. Analysis of the relatively unstudied nhr-111 and nhr-239 genes demonstrates that they are both expressed--nhr-111 very broadly and nhr-239 in a small subset of neurons. Analysis of the FAX-1 LBD in an in vivo assay revealed that it is not required for at least some developmental functions. CONCLUSIONS: Our analysis supports three conserved clades of NR2E receptors, only two of which are represented in vertebrates, indicating three ancestral NR2E genes in the urbilateria. The lack of a requirement for a FAX-1 LBD suggests that the relatively high level of sequence divergence for Caenorhabditis LBDs reflects relaxed selection on the primary sequence as opposed to divergent positive selection. This observation is consistent with a model in which divergence of some Caenorhabditis LBDs is allowed, at least in part, by the absence of a ligand requirement.