We analyze optical and ultraviolet observations of the symbiotic binary AG Pegasi acquired during 1992-97. The bolometric luminosity of the hot component declined by a factor of 2-3 from 1980-1985 to 1997. Since 1992, the effective temperature of the hot component may have declined by 10%-20%, but this decline is comparable to the measurement errors. Optical observations of H-beta and He I emission show a clear illumination effect, where high energy photons from the hot component ionize the outer atmosphere of the red giant. Simple illumination models generally account for the magnitude of the optical and ultraviolet emission line fluxes. High ionization emission lines - [Ne V], [Mg V], and [Fe VII] - suggest mechanical heating in the outer portions of the photoionized red giant wind. This emission probably originates in a low density region $\sim$ 30-300 AU from the central binary.

17 pages, 7 pages, 5 tables; to be published in the Astronomical Journal, July 2001