Sexually dimorphic coloration that plays a role in social signaling during stereotypical displays is well known in lizards. Previous studies on a large Australian agamid lizard (Eastern Water Dragon, Intellagama lesueurii) documented male-biased sex differences in ventral coloration, but males were not observed to use postures that displayed their ventral surfaces. Male resource-holding potential (RHP) was determined by body size, with the largest individuals controlling territories in preferred riparian habitat. Both large males that defended territories and those that did not had fully developed ventral coloration. Together these observations suggested that male ventral coloration does not play a role in social communication in male Water Dragons. We tested this hypothesis by recording the behavior of free-ranging males during baseline social conditions and when the level of aggression was much higher because we temporarily removed and then reinstated territory owners. Male Water Dragons performed three behavior patterns that displayed their conspicuous ventral coloration when engaged in agonistic encounters with same-sex rivals, especially when social conditions among neighboring males were unstable. Rival males responded to these displays in all instances. A large, model Water Dragon male in which we manipulated ventral color elicited lower-intensity responses from rival males when the model ventral surface was red than when it was brown. This result is also consistent with the hypothesis that red coloration plays a role in signaling and perhaps in intimidation of rivals. Water Dragon displays that revealed ventral coloration were not given when males interacted with females, suggesting red coloration does not function in advertisement to potential female mates. Our results support the hypothesis that red ventral coloration in Eastern Water Dragons functions in advertisement to rival males similar to the function of red coloration in several other vertebrates.