Homeobox genes are regulators of place-dependent morphogenesis and play important roles in controlling the expression patterns of cell adhesion molecules (CAMs). To identify proteins that bind to a regulatory element common to the genes for two neural CAMs, Ng-CAM and L1, we screened a mouse cDNA expression library with a concatamer of the sequence CCATTAGPyGA and found a new homeobox gene, which we have called Barx2. The homeodomain encoded by Barx2 is 87% identical to that of Barx1, and both genes are related to genes at the Bar locus of Drosophila melanogaster. Barx1 and Barx2 also encode an identical stretch of 17 residues downstream of the homeobox; otherwise, they share no appreciable homology. In vitro, Barx2 stimulated activity of an L1 promoter construct containing the CCATTAGPyGA motif but repressed activity when this sequence was deleted. Localization studies showed that expression of Barx1 and Barx2 overlap in the nervous system, particularly in the telencephalon, spinal cord, and dorsal root ganglia. Barx2 was also prominently expressed in the floor plate and in Rathke's pouch. During craniofacial development, Barx1 and Barx2 showed complementary patterns of expression: whereas Barx1 appeared in the mesenchyme of the mandibular and maxillary processes, Barx2 was observed in the ectodermal lining of these tissues. Intense expression of Barx2 was observed in small groups of cells undergoing tissue remodeling, such as ectodermal cells within indentations surrounding the eye and maxillo-nasal groove and in the first branchial pouch, lung buds, precartilagenous condensations, and mesenchyme of the limb. The localization data, combined with Barx2's dual function as activator and repressor, suggest that Barx2 may differentially control the expression of L1 and other target genes during embryonic development.