A hallmark of homeobox genes is their high degree of sequence conservation in distantly related species. Here, we report the chromosomal localization, sequence, and expression pattern of an orphan homeobox gene, Pem, that encodes a homeodomain (HD) that has undergone a surprisingly high rate of evolutionary change. The N-terminal portion of the Pem HD, which includes the first two alpha-helices, exhibits only 44% sequence identity between rat Pem (r.Pem) and mouse Pem (m.Pem). This N-terminal subdomain exhibited an extremely high frequency of nonsynonymous substitutions, severalfold higher than other regions of the Pem protein. In contrast, the third helix, which is known to confer most of the base-specific contacts of HDs with DNA, was almost identical in r. Pem and m.Pem. Several lines of evidence suggested that the rat and mouse genes that we identified as Pem genes are true homologues: (1) the r.Pem and m.Pem genes both reside on the X chromosome; (2) they possess identical exon/intron splice junctions; (3) they both encode a distinctive motif upstream of the HD that is unique to Pem; and (4) the only m.Pem-like gene we were able to identify in the rat genome other than r.Pem was a pseudogene, r.Pem-ps, whose sequence and chromosomal localization indicated that it was derived by reverse transcription and reinsertion into the genome. The functional r.Pem gene is selectively expressed in placenta, testis, epididymis, and ovary. This expression pattern is of interest since other genes transcribed in reproductive tissue have also been shown to undergo high rates of sequence divergence. The high rate of amino acid substitutions in the N-terminal region of the Pem HD suggests the possibility of species-specific directional selection.