Genetic analysis of the development and evolution of the vertebrate head is at a primitive stage. Many homeo box genes, including the Distal-less family, are potential regulators of head development. To determine the function of Dlx-2, we generated a null mutation in mice using gene targeting. In homozygous mutants, differentiation within the forebrain is abnormal and the fate of a subset of cranial neural crest cells is respecified. The latter causes abnormal morphogenesis of the skeletal elements derived from the proximal parts of the first and second branchial arches. We hypothesize that the affected skull bones from the first arch have undergone a transformation into structures similar to those found in reptiles. These results show that Dlx-2 controls development of the branchial arches and the forebrain and suggests its role in craniofacial evolution.